No Need to Pay Taxes on Most Employee Discounts

QUESTION: I work in a clothing boutique and get discounts on clothes I buy there. It had never occurred to me that the IRS might tax the difference between the retail price and the price I pay, but I heard on a radio program the other day that some people would like to tax airline employees who get free trips and I wondered about my situation. Am I doing something illegal?--A. F.

ANSWER: You’re not doing anything wrong--as long as you and your employer follow certain IRS rules.

Generally, employee discounts aren’t taxable as long as the discounted good or service is one that the employer offers the general public as part of its line of business and isn’t purchased specifically to resell to employees. If the employer has to incur extra costs to provide this discount, the discount is subject to taxation.

There also are size limits. Your discount can’t exceed your employer’s gross profit on the clothes. And employers who give their employees discounted services--such as a cable-TV company charging employees cheaper cable installation fees--can’t discount their usual fee by more than 20%.

Q: My husband and I are planning to claim my parents as a deduction on our income tax return. But in looking over the forms, we aren’t sure how to determine the value of our support of them--mostly because they live with us. Can you help?--D. M.

A: You simply figure out what you could charge someone to rent the part of the house they occupy--the so-called imputed rental value.

Then, add that rental figure to any expenses you incur for their food, medical care, clothing and the like. The total must be more than half of your parent’s total support for the year in order for you to claim them as dependents.

In addition, their gross income for the year must be less than the standard exemption--$1,900 for 1987 and $1,950 for 1988--if you are to claim them as dependents. For this purpose, Social Security payments don’t count.

Q: In last week’s column, you said withdrawals from IRAs are subject to very strict guidelines and that people could incur a 15% penalty if they withdrew too much money. I have never heard of this penalty problem. Could you elaborate?--E. S.

A: Under the new tax laws, anyone who takes so-called excess distributions from an IRA is subject to a 15% excise tax. But don’t be alarmed. The penalty doesn’t kick in unless you receive very large distributions--something many taxpayers try to avoid because they have to pay income taxes on the money they withdraw.

The penalty is imposed if your total retirement distributions--from such things as pension plans, IRAs and tax-sheltered annuities--in a single year exceed either an inflation-adjusted $112,500 or $150,000 on a non-adjusted basis.

Incidentally, last week’s column also noted that taxpayers generally pay another penalty if they withdraw IRA money before they turn 59 1/2. But it failed to mention that the new law also permits IRA owners of any age to make withdrawals if they follow new annuity payout rules.

Under these new rules, someone under age 59 1/2 can withdraw from his IRA and still avoid paying a penalty if his withdrawals are part of a series of substantially equal distributions spread out over a period of years based on his life expectancy.