Co-workers gift - taxable income?


T

TheMightyAtlas

An employee at my company experienced a serious illness and ran into
some financial difficulty. His co-workers (several hundred of them)
collected almost $15,000 and presented it to him. As far as I know, no
legal entity was set up to receive the money, just a separate bank
account in the name of one of the organizers (this thing became much
bigger than anyone had anticipated). Is the money taxable income to
the recipient or is it just a non-taxable gift? I assume that none of
the "donors" gets a deduction because this is not a qualified
organization.
 
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P

Paul Thomas, CPA

TheMightyAtlas said:
An employee at my company experienced a serious illness and ran into
some financial difficulty. His co-workers (several hundred of them)
collected almost $15,000 and presented it to him. As far as I know, no
legal entity was set up to receive the money, just a separate bank
account in the name of one of the organizers (this thing became much
bigger than anyone had anticipated). Is the money taxable income to
the recipient or is it just a non-taxable gift?



Non-taxable gift. At least the part from the co-workers.


I assume that none of the "donors" gets a deduction
because this is not a qualified organization.


Non-deductible gift.
 
K

kastnna

Non-taxable gift.  At least the part from the co-workers.
Paul, please enlighten me. What do you mean by your last sentence?

Thanks in advance.
 
T

TheMightyAtlas

Paul, please enlighten me. What do you mean by your last sentence?

Thanks in advance.
Sometimes there is some kind of matching by the employer. You can
almost never receive a non-taxable "gift" from your employer. In this
case there was no matching, though happily it has triggered the
company to set up a fund for such circumstances, funded by the
company, but administered by a committee of employees. I am pretty
sure the payments from this fund will in fact be taxable income.
 
D

Dick Adams

TheMightyAtlas said:
An employee at my company experienced a serious illness and ran into
some financial difficulty. His co-workers (several hundred of them)
collected almost $15,000 and presented it to him. As far as I know, no
legal entity was set up to receive the money, just a separate bank
account in the name of one of the organizers (this thing became much
bigger than anyone had anticipated). Is the money taxable income to
the recipient or is it just a non-taxable gift?
The general rule is gifts are not taxable to the receipient.
There are numerous excepts to this rule, but none of them
appear to apply here.
I assume that none of the "donors" gets a deduction because this is
not a qualified organization.
You are correct, but there would be no deduction even if
there was a qualified organization involved because the
gifts were intended for a specific individual.

Dick
 
G

Gil Faver

Paul Thomas said:
Non-taxable gift. At least the part from the co-workers.






Non-deductible gift.

Agreed. Now, for the sake of curiosity - how might this be set up defiantly
if there were to be a much larger amount of money gathered? A separate bank
account in the name of one of the giftors does not sound like the best way
to go.
 
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A

Arthur Kamlet

Agreed. Now, for the sake of curiosity - how might this be set up defiantly
if there were to be a much larger amount of money gathered? A separate bank
account in the name of one of the giftors does not sound like the best way
to go.

Something I've seen done is to have a church, say, agree to set up
a fund to help out people who have come down with serious illness
and need financial help. A church committee is selected to manage
the fund and allocate the money collected. It is the church committee
who makes the decision. It would not be stretching it too much to
have the committee establish subfunds by Employer, to allow
contributers to donate to the fund's XTZ Corp subfund.

The subfund's money can then be allocated to needy employees of
that company.

In all cases the church board appoints the committee members
who decide who gets the money.
 
K

kastnna

Sometimes there is some kind of matching by the employer. You can
almost never receive a non-taxable "gift" from your employer. In this
case there was no matching, though happily it has triggered the
company to set up a fund for such circumstances, funded by the
company, but administered by a committee of employees. I am pretty
sure the payments from this fund will in fact be taxable income.
Interesting. Thanks for the education.

[que "The more you know" music]
 
S

Stuart Bronstein

Gil Faver said:
Agreed. Now, for the sake of curiosity - how might this be set up
defiantly if there were to be a much larger amount of money
gathered? A separate bank account in the name of one of the
giftors does not sound like the best way to go.
There are all kinds of options. For one, it may well be possible to
find a nonprofit that will act as fiscal agent, and accept donations
earmarked for the sick employee's health and welfare. The nonprofit
would take a management fee, probably between 5 and 10 percent. But
then the donations would be deductible to the contributors.

Stu
 
S

Stuart Bronstein

You are correct, but there would be no deduction even if
there was a qualified organization involved because the
gifts were intended for a specific individual.
I've seen donors earmark gifts, and the gifts were still deductible.
The proposed use of the funds would have to be within the exempt
purpose of the nonprofit, though, and they would be ultimately
responsible for being sure that the funds were used for that purpose.
But I don't see why it can't be done.

I have been known to be wrong on occasion, so if I am here I'd love to
know about it.

Stu
 
R

removeps-groups

I've seen donors earmark gifts, and the gifts were still deductible.
The proposed use of the funds would have to be within the exempt
purpose of the nonprofit, though, and they would be ultimately
responsible for being sure that the funds were used for that purpose.
But I don't see why it can't be done.
In the past I have earmarked my charitable contribution for particular
projects. There are some charitable organizations that collect money
and distribute that money to other charities that do the actual work,
sort of like a mutual fund of charities. In my donation to the mutual
fund charity I earmarked contributions for a particular project -- ie.
a real charity that does something specific. But contributions to
specific individuals are not allowed

http://www.irs.gov/publications/p526/ar02.html#d0e1180

Contributions to Individuals

You cannot deduct contributions to specific individuals, including the
following.

*

Contributions to fraternal societies made for the purpose of
paying medical or burial expenses of deceased members.
*

Contributions to individuals who are needy or worthy. This
includes contributions to a qualified organization if you indicate
that your contribution is for a specific person. But you can deduct a
contribution that you give to a qualified organization that in turn
helps needy or worthy individuals if you do not indicate that your
contribution is for a specific person.

Example. You can deduct contributions for flood relief,
hurricane relief, or other disaster relief to a qualified
organization. However, you cannot deduct contributions earmarked for
relief of a particular individual or family.
*

Payments to a member of the clergy that can be spent as he or
she wishes, such as for personal expenses.
*

Expenses you paid for another person who provided services to a
qualified organization.

Example. Your son does missionary work. You pay his expenses.
You cannot claim a deduction for your son's unreimbursed expenses
related to his contribution of services.
*

Payments to a hospital that are for a specific patient's care or
for services for a specific patient. You cannot deduct these payments
even if the hospital is operated by a city, state, or other qualified
organization.
 
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R

removeps-groups

Sometimes there is some kind of matching by the employer. You can
almost never receive a non-taxable "gift" from your employer
In this case, would the income be Other Income, just subject to
federal taxes; or Schedule C subject to federal and FICA taxes?

Maybe the money the employer contributes could somehow be under
section 125 (cafeteria plan) and therefore not subject to any taxes,
not even state or local taxes?
 
S

Seth

In this case, would the income be Other Income, just subject to
federal taxes; or Schedule C subject to federal and FICA taxes?
Almost certainly W2.

Seth
 
R

removeps-groups

Almost certainly W2.
What if the company has a policy like this: match employee
contributions dollar for dollar up to $1000, and the beneficiary must
be an employee and sick in a hospital or equivalent, and all of the
$1000 is used towards medical expenses with documentation to prove it.
 
R

removeps-groups

An employee at my company experienced a serious illness and ran into
some financial difficulty. His co-workers (several hundred of them)
collected almost $15,000 and presented it to him. As far as I know, no
legal entity was set up to receive the money, just a separate bank
account in the name of one of the organizers (this thing became much
bigger than anyone had anticipated). Is the money taxable income to
the recipient or is it just a non-taxable gift? I assume that none of
the "donors" gets a deduction because this is not a qualified
organization.
For completeness I should mention that the 15k can be deductible on
Schedule A, subject to the 7.5% of AGI limit. (However, if any part
of the 15k comes from the employer and is not subject to tax by the
cafeteria plan rules, then I imagine that part cannot be deducted.)
 
T

Tom Russ

http://www.irs.gov/publications/p526/ar02.html#d0e1180
...

You cannot deduct contributions to specific individuals, including the
following.

 ...
      Contributions to individuals who are needy or worthy. This
includes contributions to a qualified organization if you indicate
that your contribution is for a specific person. But you can deduct a
contribution that you give to a qualified organization that in turn
helps needy or worthy individuals if you do not indicate that your
contribution is for a specific person.

      Example. You can deduct contributions for flood relief,
hurricane relief, or other disaster relief to a qualified
organization. However, you cannot deduct contributions earmarked for
relief of a particular individual or family.
So does that mean that contributions to a charity like the Christian
Children's Fund, where you sponsor a child (<http://
www.christianchildrensfund.org:80/content.aspx?id=113>) would be non-
deductible because they go to the benefit of a particular, identified
individual?

Does the aggregation step (described in the link) get around this
particular limitation?
If so, presumably any "special gifts" would still be non-deductible,
right?
 
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H

Harlan Lunsford

Stuart said:
There are all kinds of options. For one, it may well be possible to
find a nonprofit that will act as fiscal agent, and accept donations
earmarked for the sick employee's health and welfare. The nonprofit
would take a management fee, probably between 5 and 10 percent. But
then the donations would be deductible to the contributors.
I know this has been discussed before, i.e. using a nonprofit org that
acts as a conduit to a specific individual, but I have a hard time
accepting this idea, since it's clearly a subterfuge.

Call me old fashioned.
(but CALL me! grin)

ChEAr$,
Harlan
 
H

Harlan Lunsford

For completeness I should mention that the 15k can be deductible on
Schedule A, subject to the 7.5% of AGI limit. (However, if any part
of the 15k comes from the employer and is not subject to tax by the
cafeteria plan rules, then I imagine that part cannot be deducted.)
Let me get this straight, now. You're saying that an individual who
receives tax free gifts, bona fide, real, GIFTS.... can also deduct the
medical expenses paid with such GIFTS.

Yes, I know the law, too, but this somehow don't seem right atall.
Not illegal maybe, but unethical.

ChEAr$,
Harlan Lunsford, EA n LA
 
T

TheMightyAtlas

Let me get this straight, now. You're saying that an individual who
receives tax free gifts, bona fide, real, GIFTS.... can also deduct the
medical expenses paid with such GIFTS.

Yes, I know the law, too, but this somehow don't seem right atall.
Not illegal maybe, but unethical.

ChEAr$,
Harlan Lunsford, EA n LA
Why not? If I receive wedding gifts and use them to pay my mortgage,
would my mortgage deduction be unethical? I can't see the difference.
In this particular case the gifts came after the medical costs anyway.
The medical costs were paid out of savings or borrowing. Besides I
didn't say (I am the OP) that the difficulties were due to medical
costs. In fact many people get into financial difficulty due to
illness, but not directly due to the medical costs. Other family
members may have to take unpaid FMLA to take care of the ill person.
They may need to employ caregivers for their children on a round the
clock basis, which is a budget buster. They may need to travel to
distant locations to received specialized care. I've seen all of this
in various cases, and I am not in a profession or vocation where I
would see an unusual number of seriously ill people.
 
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D

dpb

Harlan Lunsford wrote:
....
Let me get this straight, now. You're saying that an individual who
receives tax free gifts, bona fide, real, GIFTS.... can also deduct the
medical expenses paid with such GIFTS.

Yes, I know the law, too, but this somehow don't seem right atall.
Not illegal maybe, but unethical.
....
I don't see why -- consider the case of a parent gifting to an adult
child. Would you have a problem w/ that child taking the deduction, too?

IOW, I don't see that where the money came from has any bearing on the
issue in this case either legally or ethically.

--
 

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