Annual Exclusion Gifts: Give Gifts That Your Family Will Love (but the IRS Won’t Tax)

Do not let constant political and financial speculation prevent you from making tax-free medical payment, educational and annual exclusion gifts to or for the benefit of your loved ones.

How to Make Annual Exclusion Gifts

Annual exclusion gifts are transfers of money or property in an amount or value that does not exceed the annual gift tax exclusion. In 2021, the annual gift tax exclusion is $15,000 per recipient. Therefore, this year you can give up to $15,000 per person to as many individuals as you choose without having to file a federal gift tax return (Internal Revenue Service Form 709). In other words, the Internal Revenue Service (IRS) does not consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all. You may need to file a gift tax return if your gifts either exceed or do not qualify for the annual exclusion amount. Your estate planning attorney or accountant can guide 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 if the amount of the gift is to be split between them. They should consult with their estate planning attorney or accountant to be sure.

Make Payments That Qualify for the Medical Exclusion

A payment that qualifies for the medical exclusion is another type of transfer that the IRS does not consider to be a gift for gift tax purposes. Payments qualify for this exclusion if they are made on behalf of an individual to a person or an institution that provided medical care or medical insurance to the individual. 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.

DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE OR TAX ADVICE.