Gift Tax Exclusion for Payment of Qualifying Medical and Tuition Expenses

Jul 09, 2015

By Jenna Ichikawa | Related Practice: Estate Planning & Administration

During 2015 individuals may give up to $14,000 to each of an unlimited number of gift recipients without incurring any gift tax liability or using any of their lifetime federal $5.43 million exemption from gift and estate taxes.  However, many individuals do not realize that in addition to the annual $14,000 gift tax exclusion, there are also unlimited gift tax exclusions for the payment of certain qualified tuition and medical expenses.  These exclusions provide another means for donors to leverage the amount of gifts they can make tax-free to their family and friends.

For purposes of the medical expense gift tax exclusion, qualifying expenses include those made for certain medical care (e.g., amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body); transportation and lodging primarily for and essential to the foregoing medical care; certain long-term care services; and health insurance premiums.  For purposes of the tuition expense gift tax exclusion, qualifying expenses include tuition only; payments for costs of supplies, books, dormitory fees or board do not qualify for the exclusion.

For both medical and tuition expense exclusions, the donor must pay the medical or educational institution directly.  For example, the donor must pay the medical facility, health care provider, insurance company or the qualified educational organization directly.  The gift tax exclusion is not available if the donor makes the gift to the patient or student who, in turn, pays the medical or tuition expenses himself or herself.  The exclusion is also not available where a donor reimburses a patient or student for medical or tuition costs.

As with the $14,000 annual gift tax exclusion, the donor does not need to file a gift tax return simply because he or she paid for a qualifying medical or tuition expense, and the exclusion is permitted regardless of the relationship between the donor and the donee.

It is important to note that there are additional rules and limitations that apply to certain gifts (particularly those relating to medical transportation, lodging, and long-term care services) so before making such gifts, the donor should consult with his or her advisors to ensure the gift will qualify for the exclusion.  For more information about gifts of qualifying medical or tuition expenses, please contact a member of the Stokes Lawrence Estate Planning Group.