While you may think taxes on monetary gifts to your loved ones is a given, we’re here to tell you that doesn’t always have to be the case. There are actually a few circumstances in which you can provide for your family members without being taxed by the IRS.
Annual Exclusion Gifts
Annual exclusion gifts are transfers of cash or other assets in an amount or value that doesn’t exceed the annual gift tax exclusion. In 2021, the gift tax exclusion is $15,000 per recipient. That means you can give up to $15,000 per person to as many people as you want without having to file a federal gift tax return (Internal Revenue Service Form 709). If you choose to give a gift that exceeds this amount, you may need to file a gift tax return (an estate planning attorney can help you with this).
If you’re married, you and your spouse can take double advantage of the annual exclusion and gift $30,000 in 2021. However, sometimes couples may still need to file a gift tax return if the amount of the gift is split between them. Double-check with your estate planning attorney to be sure.
Medical Exclusion
Payments that qualify for the medical exclusion are another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes. Payments qualify for this exclusion if they’re made on behalf of an individual to a person or an institution that provided medical care or medical insurance to the individual. Generally, medical expenses that qualify for this exclusion are the same ones that are deductible for federal income tax purposes. Therefore, in 2021, you can pay the cost of your grandchild’s emergency appendectomy and in the same year gift them an additional $15,000 without having to file any gift tax returns.
To get even more specific, qualifying expenses include those made for certain medical care (e.g., amounts paid for the diagnosis, cure, treatment or prevention of disease); transportation and lodging primarily for and essential to the foregoing medical care; certain long-term care services; and health insurance premiums.
A payment must meet two critical requirements to qualify for the medical exclusion:
1. The payment must be made directly to the person or institution that provided the medical care or medical insurance. If you give the money to the individual who received the medical care or insurance benefit, even with explicit instructions that it be used to pay for the medical care, your payment will be considered a gift to the individual and not payment of a qualified medical expense.
2. The amount paid must not have been reimbursed by the individual’s insurance company. Any reimbursed amount is not eligible for the unlimited medical exclusion from the gift tax, and that amount will be treated as having been made on the date the individual received the reimbursement.
Educational Exclusion
A payment that qualifies for the educational exclusion is another type of transfer that the IRS does not consider to be a gift for gift tax purposes. For example, in 2021, in addition to paying for your grandchild’s emergency appendectomy and giving them $15,000 (see above), you can pay their college tuition costs without having to file any gift tax returns or pay any gift tax.
Qualifying expenses include tuition only. Payments for costs of supplies, books, room and board, or other types of education-related expenses do not qualify for the exclusion. The payment must also be made directly to the institution providing the education, not the individual receiving the education. If your payment fails to meet these requirements, it will be considered a gift to the individual.
Giving gifts can be a great way to provide financial assistance to your family members, but you have to be careful about following the requirements so they don’t get taxed.
If you have any questions about how to make gifts of money or property to your family without also giving money to the IRS, please contact Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (925) 831-4840.