Many taxpayers are familiar with the annual gift exemption, which allows donors to give up to a certain amount to a recipient annually without offsetting their lifetime estate and gift tax exemption. Annual exemptions were $14,000 in 2017 and will be $15,000 in 2018, and lifetime exemptions were $5.49 million in 2017 and will be $5.6 million in 2018. An often overlooked rule in Section 2503(e) of the Internal Revenue Code can provide opportunities to gift amounts for qualified educational and medical expenses in excess of the annual exemption to friends or family members without gift tax implications, assuming that the following guidelines are followed.
Let’s take a look at the educational expense exception first. In order to qualify, payments must be made directly to the educational organization for tuition only (not including books, supplies, room and board). Educational organizations are defined as one that normally maintain a regular faculty and curriculum and have a regularly enrolled body of students in attendance (Section 170(b)(1)(A)(ii)). As such, primary, secondary, preparatory schools, high schools, and colleges and universities all qualify. For example, grandparents that already gift the annual exemption amount to their grandchildren can also pay for their grandchildren’s tuition for private school or college without reducing their lifetime exemption.
Qualifying medical expenses can also get this preferential treatment. Medical expenses under this definition include expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease (Section 213(d)). It can also include transportation expenses for medical care and amounts paid for medical insurance. For example, a child may decide to pay nursing home expenses on behalf of their elderly parent in a nursing home without gift tax implications, assuming that the payments were made directly to the organization.
The aforementioned rules apply to any recipient, even if the recipient is not family. Be mindful that payments must be made directly to the organization providing the medical or educational services. If payment is given to the student in question who turns around and pays their educational expenses, this does not qualify for the 2503(e) exclusion.
If you have any questions about the rules above or would like help completing your gift tax return filing requirement, please reach out to your GBQ representative.
Article written by:
Jennifer Zimmerman, CPA