John Bullis: The rest of the annual gift tax exclusion

Most folks are aware of the basic annual gift exclusion of $15,000 total gifts in a calendar year to each of as many persons. That can be done and it is not a taxable gift. You do not have to file form 709 U.S. Gift Tax Return and there is no tax to pay to U.S. Treasury (IRS).

The Annual Gift Tax Exclusion includes more than just cash (currency) gifts. Another feature of the exclusion is you can pay tuition for someone else and it is not a taxable gift. You need to pay the tuition directly to the educational organization (for the student).

Not only full-time students are covered by this exclusion, but also part-time students qualify as well. It is only for tuition. Dorm fees, books and other charges do not qualify. The student can use some of the cash gift for those items.

An educational organization includes primary, secondary, preparatory, high schools as well as colleges and universities. Private schools also qualify for this tax benefit (break).

But “wait, there’s more.” When you pay medical expenses for someone else, that also is part of the annual gift tax exclusion, if you pay directly to the medical care provider (doctor, hospital, etc.) for that named individual. Qualified medical expenses are defined in the tax code section 213(d) as those incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care. IRS publication 502 has a list of qualified medical deductions.

Also, if you pay directly to the insurance company for someone else’s medical insurance premiums, that qualifies for the annual gift tax exclusion.

Each person has a “combined” estate and gift tax exemption (allowance) in 2020 of $11,580,000. The taxable gifts reduce that number, but you can do a lot with the annual gift tax exclusion that does not reduce your exemption of $11,580,000.

Suppose a married couple wants to make a gift to someone (they do not have to be a relative) but only one member of the couple has money available to do the gift. They can elect and file to “split the gift” so each is treated as making a gift. It is sort of like she gave to her husband (no tax on gifts between spouses) and then he had ability to make a gift of 50% of the total.

Did you hear “Instead of focusing on the circumstance that you cannot change, focus strongly and powerfully on the circumstances that you can change.” Joy Page