Perhaps an even greater surprise for nominees attending the 89th Annual Academy Awards than finding out who really won the Best Picture Award will be learning that those Oscar gift bags of swag come with serious tax obligations. The tax law does not view these gift bags as true gifts because the motive of the businesses in providing their products or services is to promote that product or service, not because of a philanthropic motive.
If a nominee is in the top federal income tax bracket of 39.6% and receives a gift bag valued at $100,000, the potential federal income tax is $39,600. There could also be additional state income taxes due. And the gift bag does not include cash to pay the taxes, so the taxes will have to be paid from other resources.
Of course, just because the gift bag is valued at $100,000 or more does not mean that it is necessarily that valuable to the recipient. In fact, there are steps that a nominee can take to reduce or eliminate the potential tax when there is little interest in the items included.
The nominee can refuse to accept the gift bag. By refusing to accept, the gift bag is not received for tax purposes and not subject to tax. However, if a few items catch their eye, they are not likely to be able to pull those from the gift bag and refuse to accept the rest. It is likely to be an all or nothing proposition.
The nominee could accept the gift bag and then donate to a charity or sell the items in which they are not interested. However, some items in the gift bag, such as gift cards or certificates, may be non-transferable. Some items even a charity may refuse to accept. In the case of non-transferable gift certificates, the IRS has stated that they are subject to tax if accepted and redeemed. So, failing to redeem them appears to be sufficient to avoid tax.
If the nominee is able to donate some of the items to charities, that may create an offsetting charitable contribution deduction on their tax return. However, it may not be a full offset. Charitable contribution deductions under federal law are generally limited to 50% of adjusted gross income. That might not be too much of a problem for wealthy movie stars. There is also, however, a phase-out of certain itemized deductions, including charitable contribution deductions, for higher income taxpayers. For 2017, those phase-outs start at an adjusted gross income of $261,500 for single taxpayers and $313,800 for joint filers. The phase-out is the lesser of: (1) 3% of the excess of the nominee’s adjusted gross income over these threshold amounts, or (2) 80% of the allowable itemized deductions subject to the phase-out, including charitable contribution deductions. A very high income could therefore result in the elimination of all but 20% of the charitable contribution deduction. Selling the unwanted items to star-crossed fans could result in even more income subject to tax.
Since adjusted gross income is used as a factor in determining the phase-out of many tax breaks, taking the value of the gift bag into income could result in the reduction of other tax breaks to which the nominee may otherwise have been entitled, even if they otherwise qualify for the full charitable contribution deduction.
Another possible action that the nominee could take would be, before accepting the gift bag, to review the list of contents and designate in writing certain items to be donated directly to a charity before the gift bag is accepted. While this certainly eliminates the swag surprise element on Oscar night, this advance planning could avoid the need to take the full value of the gift bag into income. There would also be no charitable contribution deduction for those items because the donation would not be viewed as coming from the nominee.
Nominees, in addition to discussions with their designer and hair stylist, might also be well advised to have a discussion with their accountant.
Mark A. Luscombe, JD, LLM, CPA is the Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting.