When it comes to retirement gifts, you never pay tax on the gifts you get unless your employer is involved. The IRS knows retirement gifts or performance awards can become a ruse to avoid income tax by paying you under the table. To prevent that, gifts from your employer are usually taxable, with exceptions. If your co-workers get together and buy you a gift with their own money, there's no tax.
When It's Cash
If the boss gives you a little bonus money to help you slide into retirement, you pay the government its share. Cash from your employer always counts as taxable income, whether it's offered as a bonus, a lifetime achievement award or for your length of service with the company. If it's a savings bond, gift certificate or anything else that can be exchanged for cash, that's also taxable. A non-cash contribution may be tax-free if it meets the IRS requirements to exclude it from your income.
You don't have to get a 21-gun salute when you retire, but your employer should do something special to mark the occasion. The IRS requires you get your gift in a "meaningful" presentation, such as a luncheon, a dinner or a special departmental meeting. It should also be timely — within the year you hang up your spurs, not five years later. A formal event makes it less likely your employer is just labeling your bonus as a "retirement award."
If your employer has a "qualified plan" for giving out retirement awards, you can accept non-cash gifts up to $1,600 tax-free. The plan is qualified if the rules for awards and gifts are written out and the size of the gift doesn't reflect the size of your paycheck. If your retirement gift is not part of a qualified plan, you can't take a gift larger than $400. You only pay tax on the gift's value above the dollar limit.
The Dollar Limit
The dollar limit is an annual one, not per gift. If your employer gives you three $300 non-qualified plan gifts over the course of the year, then a $350 non-qualified retirement award, $850 of that is taxable income. The amount you owe is usually based on the fair market value of your gift. Don't worry about figuring it out -- your employer should include the taxable value on your last W2 form. If he neglects to do this, your accountant will be able to come up with the required amount.