Make Gifts That Your Family Will Love but the IRS Won’t Tax

Don’t let constant political and financial speculation prevent you from making tax-free annual exclusions, medical payments, and educational gifts to or for the benefit of your loved ones.

These gifts can be made without having to file a gift tax return or use any of your gift and estate tax exemption ($11.7 million in 2021). For those with estates over the exemption amount, such gifts are a great way to lower estate tax exposure. The current estate tax rate is 40%.

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 per recipient 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 (i.e., the gifted property came from just one spouse). Consult with your estate planning attorney or accountant to be sure.

Make Payments That Qualify for the Medical Exclusion

Direct payment of medical expenses is another type of transfer that the IRS does not consider to be a taxable gift. 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 health 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 a gift tax return. 

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

• You must make payment directly to the health care provider, institution, or company that provided the medical care or medical insurance. If you give the money to the individual who received the health 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 his or her college tuition without having to file a gift tax return or pay any gift tax. 

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

Bottom Line

Making these tax-free gifts is an effective way to provide financial assistance to your family members, as well as reduce your estate for estate tax purposes. If you have any questions about how to make gifts of money or property to your family without triggering gift tax reporting requirements, please contact our office. We are available for in-person and virtual consultations.