Question

This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

A. $2,250B. $2,000C. $250D. Zero if Ed offers to contribute his watch and bonus to a qualified charityE. Zero - all employee awards are excluded from gross income

Answer 1

The answer is A) $2,000

Step-by-step explanation:

According to the IRS Publication 525 (2018), Taxable and Nontaxable Income

"If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. However, the amount you can exclude is limited to your employer's cost and can’t be more than $1,600 ($400 for awards that aren’t qualified plan awards) for all such awards you receive during the year. Your employer can tell you whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that don’t create a significant likelihood of it being disguised pay."

Ed has to include the $2,000 he received as income but the $250 watch can be excluded.