Making Gifts that are Not Subject to Gift Tax

Gifting can often provide support for loved ones while reducing your taxable estate because transferring assets to others will remove the value of those assets from your estate when you die. The current annual exemption is $17,000 per person per year, meaning you can gift up to that amount to as many people as you’d like without utilizing your lifetime exemption or paying any gift tax in that year. But, there are other ways to support loved ones with amounts over the annual exclusion that will not tap into your lifetime exemption (and still lower your taxable estate). The following are a few ways to make “gifts” that aren’t actually gifts for tax purposes.  

Medical Exclusion

Amounts paid on behalf of an individual to a person or institution for medical care for that individual are not subject to gift tax. Medical care includes expenses 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. Amounts paid for medical insurance on behalf of any individual are also not subject to gift taxes. The payments for the above costs must be made directly to the care provider to qualify for the medical exclusion.

Educational Exclusion

Tuition payments made on behalf of an individual to a qualifying educational organization are not subject to gift tax. Qualifying educational organizations normally maintain a regular faculty and curriculum and normally have a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The tuition payments must be made directly to the educational organization.

Political Organizations

Payments made to a party, committee, association, fund, or other organization that is organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function are not subject to gift tax. An exempt function, as used above, means influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors.

Certain Exempt Organizations

Transfers to any civic league or other organization described in IRC section 501(c)(4); any labor, agricultural, or horticultural organization described in section IRC 501(c)(5); or any business league or other organization described in section IRC 501(c)(6) for the use of such organization, provided that such organization is exempt from tax under IRC section 501(a) are also not subject to gift tax.

While gifting strategies can be an important tool in your estate planning arsenal, it’s important to work with your CPA, attorney, and financial advisor to make sure the complex rules are being followed and that the strategies fit into your overall estate plan goals. Contact us today to learn more about Boulay’s estate and trust planning services.