In light of the recent news regarding Derek Jeter’s 3000th hit, it is important to understand the difference between a gift and a reward when filing income taxes. A gift can be any tangible or intangible item willingly given to person without any type of payment or compensation. A reward is any tangible or intangible item given in recognition of a person’s service, effort or achievement.
A gift tax can be imposed on the donor, not on the donee. With the exception of four rules – gifts that are not more than the annual exclusion for the calendar year, tuition/medical expenses you pay for someone, gifts to your spouse, and gifts to a political organization. Giving a gift generally does not affect your federal income tax return, unless you make charitable donations.
A reward is different from a gift because you are doing something that ultimately allows for some type of compensation. This could be ranging from getting salary under employment or getting a medal of honor for fighting in the military. In the recent case with Christian Lopez giving a valuable baseball in exchange for tickets, seats and memorabilia, it would be considered a reward exchange. Any reward is taxed on the receiver. It would fall under the receiver’s personal income tax statement.
It is important to differentiate “gift” and “reward” as not to pay more or less on your taxes. Even though Lopez made an honorable action, he still must be taxed on the reward he was given, thus he must put his earnings on his income statement.