The holiday season is a time for giving, and gift cards are a popular option for friends, family, and business associates. They provide flexibility and ease, allowing recipients to choose exactly what they want. But while gift cards offer convenience, they can come with hidden costs and potential pitfalls that may surprise both givers and recipients. As your trusted CPA firm, we’re here to shed light on the nuances of gift cards and how to make informed decisions, ensuring your holiday season is as stress-free as possible.
Prepaid vs. Retail Gift Cards: What’s the Difference?
Gift cards typically fall into two categories: prepaid cards (often referred to as “open-loop” cards) and retailer-specific cards (“closed-loop” cards).
Prepaid Cards
Open-loop cards, such as those from Visa and Mastercard, can be used almost anywhere their networks are accepted. This makes them highly versatile. However, they often come with fees, including activation fees, monthly maintenance charges, and replacement fees if the card is lost. For instance, Visa’s activation fees range from $2.95 to $6.95, depending on the card’s value.
Retailer-Specific Cards
Closed-loop cards from popular brands like Amazon, Walmart, or Target are limited to purchases within their respective ecosystems. While these cards usually don’t have activation fees, they come with other limitations. For example, an Amazon gift card is only usable online, and non-Prime members may face additional shipping fees.
Before purchasing either type of card, it’s essential to understand the associated costs and restrictions. A professional consultation with a CPA firm can provide clarity on the best options for personal or business gifting.
Hidden Costs and Common Pitfalls
Gift cards may seem straightforward, but their terms can include surprising fees and conditions:
- Inactivity Fees
If a card remains unused for an extended period, issuers may charge dormancy fees, eating into the balance. - Expiration Dates
While federal law offers some protection (gift cards can’t expire within five years of issuance under the CARD Act), some states provide even greater safeguards. For example, states like California and Florida prohibit expiration altogether. - Unused Balances
A significant percentage of gift cards go unused. A 2024 Bankrate study found that 43% of Americans hold unused gift cards, amounting to an astonishing $27 billion. These balances often expire or are forgotten.
Our CPA firm encourages careful review of terms and proactive communication with recipients to ensure gift cards are used efficiently.
Legal Protections for Gift Card Users
The CARD Act of 2009 provides some relief for gift card users, ensuring:
- Cards must be valid for at least five years.
- Fees must be disclosed before purchase.
- Expiration terms and fees must be prominently displayed.
However, additional protections vary by state. For example, New York extended the validity period to nine years, while Massachusetts requires seven years. Staying informed about these laws can save both money and frustration.
A CPA firm can assist businesses and individuals in understanding how these regulations affect their gift-giving practices, especially for corporate gifting.
Tips for Getting the Most Out of Gift Cards
Here are a few practical tips to maximize the value of gift cards this holiday season:
- Read the Fine Print
Check both sides of the card for information on fees, expiration dates, and usage limitations. - Register the Card
Some cards allow online registration. This step can help track balances and provide a safety net if the card is lost. - Encourage Prompt Use
Promptly using a gift card reduces the risk of misplacing it or forgetting its balance. - Explore Refund or Exchange Options
In certain cases, cards with small balances may be exchanged for cash, depending on state laws. Third-party platforms like CardCash and Raise also offer the option to sell unused cards. - Document Purchases
For businesses using gift cards for corporate gifting, keeping detailed records is essential. A CPA firm can guide you through the tax implications and reporting requirements for gifting in a professional setting.
Balancing Convenience with Financial Savvy
Gift cards remain a convenient and thoughtful option, especially for those hard-to-buy-for recipients. By understanding the potential drawbacks — such as fees, expiration dates, and the risk of unused balances — you can make more informed decisions. Whether you’re giving or receiving, taking the time to read the fine print and understand the applicable legal protections is crucial.
Need Guidance? Contact Our CPA Firm
At Burton McCumber & Longoria, we’re committed to helping you navigate financial decisions, including those tied to the holiday season. Whether you’re a business planning employee gifts or an individual managing your holiday budget, our experienced professionals are here to assist. Contact us today to schedule a consultation and learn how we can help you make the most of this festive season.
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