Ask F+H: Does My Father Need to File a Gift Tax Return?

Dear Friedman Huey,

My father needs more assistance at home as he gets older. To help him remain in his home, we immediately hired Quinn, a caregiver through a home healthcare company. Quinn has been an incredible asset to our father and our family, consistently exceeding our expectations. Although we’ve only known Quinn for a short time, my sister and I already feel as though Quinn is part of the family.

My father, who remains mentally sharp, wishes to express his deep appreciation to Quinn with a $50,000 Christmas gift. Would Quinn need to pay taxes on this? Does my father need to file a gift tax return? I’m not even sure where to begin!

• Confused and Looking For Help

Dear Confused,

You’ve come to the right place! Friedman + Huey has many gift tax experts who can help you navigate this complex issue, as there are a few nuances here.

Under the Internal Revenue Code, a gift is defined as “a transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” The IRS rules make it difficult to give gifts to employees, including quasi-employees. While the term quasi-employee does not have a definition under the internal Revenue Code it is best to think of the employment situation between a freelancer and traditional employment – usually with a single long-term client – making it a blurry situation. The IRS may look at any gifts made as compensation for employment with the intention of not paying taxes. In this case, Quinn is an employee of a home healthcare company, engaged in providing services to your family. If the payment is made in the context of employment and is motivated by services rendered rather than “disinterested generosity,” the IRS may view this as a transactional relationship. That means it is possible that it may not qualify as a gift under the tax code.

There have been a few tax court cases—though rare—that establish a high standard for proving a payment is truly a gift. These cases require the payment to be voluntary, unexpected, and not tied to job performance. Some families write a letter of intent for the gift, carefully avoiding terms like “bonus” or “payment.” However, this approach is risky and often unsuccessful, as the IRS tends to view such payments as compensation due to the nature of the relationship. Your note that Quinn “performed above our expectations” reinforces the idea that the gift is tied to performance. Therefore, it is risky for your father to make the gift as you described. Additionally, if your father does make the payment and the IRS views this as compensation, it will be income to Quinn. This may not be ideal, especially since Quinn is already employed by a home healthcare company. Your father may run into employment tax issues as well.

It may be possible to leave a bequest in a Will or Trust to Quinn if your father feels strongly about it but consult with an estate planning attorney as there are rules under state laws regarding this that need an attorney to navigate them to ensure your father’s wishes are carried out.

We strongly recommend your father consult with his Friedman + Huey tax advisor and his estate planning attorney before making any changes to your father’s estate plan.