It was a good Easter weekend for Stacy Knutson, a waitress at the Fryn’ Pan restaurant in Moorhead, Minnesota.
Knutson was working a shift in November when a customer left a take out box on the table. Knutson tried to return the box to the customer but was told that she could keep it. When Knutson opened the box, she found bundles of money inside. Lots and lots of bundles. $12,000 worth of bundles.
So pay dirt, right?
Not so fast. Knutson, a struggling mother of five kids, decided to report the cash to the police. It was, after all, a lot of money and she apparently felt kind of weird about keeping it. She was told to wait a few months in case the woman who left the money came back to claim it. So wait she did. And someone did finally claim it: the police.
The Moorhead Police Department/Keystone Cops kept the money, claiming that there was drug residue on the money. It was, they concluded, drug money and therefore subject to seizure under state law.
Knutson hired an attorney, Craig Richie, to get the money back. Richie argued, among other things that most money you carry has drug residue on it (if you’ve ever worked retail, you know this is true) and that Knutson could have kept the money and didn’t. Now, she was being punished for doing the wrong thing.
Fortunately, the police and the county attorney’s office changed their position. It might have had a little something to do with the lawsuit filed against them by Knutson. Or maybe they just realized how ridiculous they sounded. At any rate, Knutson gets to keep the $12,000.
Case closed, right? Not so fast.
News agencies have referred to the money as a tip or a gift as if the terms are interchangeable. Only they’re not. Whether it’s a tip or a gift makes a huge difference to Knutson for tax purposes.
Tips are considered wages. That makes the federal income tax implications very simple: income to Knutson of $12,000.
Gifts, however, have very different tax implications. For federal income tax purposes, gifts are not taxable to the recipient. So, zero income to Knutson.
The tax burden of a gift falls to the giver, as counter-intuitive as that sounds. Any federal gift tax consequences would be borne by the giver. In this case, the gift was $12,000. Each person can gift up to $13,000 per person per year without any gift tax consequences. So if this really was a gift, and it’s under the threshold, it’s federal gift tax-free to the giver.
That’s a huge difference.
Even Knutson herself seems to acknowledge this. While initially referring to the money as a tip, she most recently claimed that it was a gift from someone who knew she was having money troubles. Her attorney agreed, invoking an even higher authority than the Internal Revenue Service (IRS): he says that money was intended as a gift to the family because “Stacy is a very religious woman and this is the will of God.”
Like the IRS is going to argue with God?
