Tax Exempt Gifts of Tuition and Medical Expenses

expenses

Gregory Lambourne, Esq.

Senior Planning Consultant

 

You may be aware that the tax code grants taxpayers a $16,000 annual exemption from gift and generation-skipping transfer (GST) taxes. That means you (and every other taxpayer you know) can gift any person(s) up to $16,000 per year gift and GST tax-free. Good financial planning and estate planning involves utilizing this annual exemption and the estate tax-free compounding such gifting can provide.

What you may NOT realize is that you can also gift an UNLIMITED amount of tuition and medical expense payments gift and GST tax-free, so long as you make those payments directly to the service provider yourself.  This is an oft unrealized and underutilized benefit in financial and estate planning.

Here are some details to consider with your advisors:

  • Gifts to beneficiaries to use for tuition and medical expenses will NOT qualify for the tax exclusion, nor will reimbursement of such expenses. The exemption applies strictly to payments made by the donor directly to the service providers for the benefit of the intended donees.
  • Gifts to a trust generally do NOT qualify for the annual gift and GST tax exclusion since such gifts in trust are not “present interests” but merely intangible “future interests” in the trust property. Only gifts of actual present interests in property qualify for the annual exclusion. Relatedly, gifts to trusts to be used for future beneficiary tuition and medical expenses generally do not qualify for the unlimited tuition and medical expense exemption.
  • Qualified education expenses include only tuition expenses. However, if the tuition costs includes books, supplies, dormitory fees, room and board, and similar expenses, such costs will qualify since they are part of the direct tuition costs. If such expenses are NOT part of the direct tuition costs, they will NOT qualify for the exemption.  However, prepayment of tuition for future years may qualify for the exclusion.
  • Qualified medical expenses are wide-ranging and may include such things as payments for diagnosis, cure, mitigation, treatment, or prevention of disease, for transportation essential to medical care, and for medical insurance and medically necessary home care, so long as the payments are made pursuant to medically proscribed care.  The exclusion does not apply to amounts reimbursed by insurance. If any reimbursement occurs, the gift donor is treated as having made an otherwise taxable gift to the donee on the insurance reimbursement date.

Please contact your tax advisor at WFY to discuss the appropriate use of this important tax exemption and planning tool for your family. Click here to contact a WFY tax advisor.