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Holiday tips can be taxing

It's that time of year to think about those special tips we give and receive during the holiday season.

In general, it's customary to tip people who reliably and faithfully served you all year long. It's a good idea to extend a gesture of thanks to people who make your life better, easier or safer in some way. Of course you want to recognize their service but you also want to do what's appropriate.

Tipping and Taxes

Of course, most charitible donations are tax deductible. However, most tips are not tax deductible, but there are possible exceptions. Donating school supplies may qualify as a charitable donation. You can only deduct the amount of your contribution that is more than the value of the benefit that you or your dependents enjoy. In other words, if you give school supplies, you can only deduct the value of the supplies that do not benefit your child.

Holiday gifts given to the neighborhood police or fire department can also be tax deductible as charitable donations. An example of this is a gift to their widows and orphans fund.

If you receive them, keep a daily record of tip income. Do not report service charges that your employer adds to the bill as these are included by your employer in your W-2 wages. You should report all other tips you receive to your employer, who will then withhold taxes from your wages and report the proper amount to Social Security. Doing this could boost the amount of Social Security benefits you may receive when you retire.

You may be exempt from reporting tips if it's not customary to receive tips for the service you provide. The IRS may be willing to concede that additional but infrequent payments you receive from customers in the course of delivering services may not be tips and may be tax-free gifts from the customer.

When Not to Give Cash

When it comes to giving tips, cash is king. As much as folks would like to receive it, cash is not always an appropriate gift to give. For example, what's the message when you give your child's teacher $25 cash? It may create the appearance of a payment for preferential treatment for your child. Also, accepting cash can be against professional or ethical standards for folks like your lawyer, financial advisor or accountant. Finally, keep in mind that when it comes to giving gifts to civil servants, such as postal employees, they are not allowed to accept cash. They are also prohibited from accepting gift cards or anything worth more than $20.

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