Ex Gratia Payment from Ex Employer after retirement.

[sidbee]

My Father may get an Ex Gratia Payment from Ex Employer after retirement in his foreign account . This payment in like a gift as the inflation is going up and the pension is very less . Does IRS tax Ex Gratia payment ? it does not tax gifts . This payment is less than 3K usd .

[Anonymous_]

@pk

[Opus 17]

If you are a US taxpayer (as a citizen, green card holder, or resident alien) then whether or not the payment is taxable depends on US tax law, not the laws of the country where the payment was made.  

Unfortunately, I can’t find a clear answer on this, so maybe another expert will have a better answer. On one hand, if the employer has no obligation to make the payment, then it might be considered a gift. On the other hand, if the payment is meant to supplement a pension because of inflation, and especially because the employer is only making similar gifts to former employees, then it sounds like this could be taxable income as payment for prior services or as an increased pension.  I found one tax court case that indicated that a similar “gift” was taxable compensation, but the facts are so different that I don’t think that case helps us here. I will be interested to see what other people think.

[Opus 17]

One of the deciding factors would be whether or not the employer is deducting the payment as a business expense on his own tax return. If the employer is deducting this as a business expense, then it is not a gift because a free gift is not a deductible business expense (in the US, at least). However, this is something we will likely never know.