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Non Taxable Gifts not Included in Your Taxable Estate

In this current political climate, it’s easy to be frightened away from making Non Taxable Gifts or tax-free gifts, medical payments, and educational gifts to or for the benefit of your loved ones.

Make Annual Exclusion – Non Taxable Gifts

Annual exclusion gifts are transfers of money or property that don’t exceed the annual gift tax exclusion. In 2021, the annual gift tax exclusion is $15,000 per recipient. That means you can make a non taxable gift of up to $15,000 to as many people as you want. The good news is you won’t have to file a federal gift tax return. The IRS doesn’t consider a $15,000 gift to be a taxable gift. However, you may need to file a gift tax return if your gift exceeds or doesn’t qualify for the annual exclusion. Your estate planning attorney or accountant can counsel you.

Married couples can take double advantage of the annual exclusion and gift $30,000 in 2021. However, in some situations, a couple may still need to file a gift tax return. They should consult with their estate planning attorney or accountant to be sure.

Make Payments That Qualify for the Medical Exclusion

Medical payments for the benefit of another may also be a non taxable gift. To qualify, these payments must be made on behalf of another. In general, 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, give your grandchild an additional $15,000 without having to file any gift tax returns. 

To qualify for the medical exclusion, a payment must meet two critical requirements.

  • You must make payment 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.
  • 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.

Make Payments That Qualify for the 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. 

To qualify for the educational exclusion, a payment must meet two critical requirements.

  • You must make payment directly to the institution providing the education rather than to the individual receiving the education.
  • Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.

If your payment fails to meet either of these requirements, it will be considered a gift to the individual.

Giving gifts can be an effective way to provide financial assistance to your family members. 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 our office. We are available for in-person and virtual consultations.

Francine D. Ward
Attorney-At-Law, Author, Speaker

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