Dan Hall & Associates Solid Plans for Peace of Mind

Unlimited Tuition and Medical Gifting

Additional Excludable Gifts

In addition to the $14,000 annual exclusion amount, unlimited gifts can also be made in the form of tuition or medical expenses, tax free.  The gifts can be made on behalf of anyone you choose (not just family), as long as the payments to be excluded from the tax are paid directly to the health care provider or educational institution (IRC Section 2503(e)).  These payments are then excluded from both the gift tax and the generation skipping transfer tax.

What can the payments be applied to?

Education

For education, the exclusion is limited to tuition, and cannot be applied to payments for books, supplies, dormitory and boarding fees, or other similar costs not directly related to tuition.  However, the exclusion applies to tuition expenses for full-time or part-time students at any institution that maintains a regular faculty and curriculum and has students in attendance, meaning the exclusion payments can be used for private primary and secondary schools as well, not just higher education.

The tuition money can also be prepaid.  You could, for example, choose to prepay tuition for your three grandchildren for the next five (or however many) years, and this would still qualify for the exemption as long as the money is paid directly to the institution, is to be used exclusively for tuition, and is non-refundable.  You must also agree to pay any increases in tuition imposed by the school in subsequent years.  Be aware, though, of the potential risk with this idea: the child may not end up attending that particular school, or may decide to transfer to another school, and the prepaid money is generally non-transferable.  However, if this risk seems unlikely (the child already attends the school and loves it!), then this may be a good idea.

Medical

For medical expenses, the exclusion applies to: expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease; expenses for transportation essential to medical care; expenses for prescription drugs; and premiums for medical insurance.  Insurance may include regular health insurance and long term-care insurance.  However, medical payments must be for tax-deductible items (cosmetic surgery, for example, is not covered by this and so would not count for the exclusion).  Note: the exclusion only includes the portion of medical expenses not reimbursed to the donee by insurance.

Benefits

The benefits to this (in addition to the benefits of gift giving in general), are that there is no dollar limitation on this type of excludable gift, and that these gifts can be given to an individual in addition to the annual exclusion amount without reducing the donor’s lifetime exemption.  Additionally, the dollars gifted are immediately outside of the donor’s estate for estate tax purposes, even if made very shortly before the donor’s passing.

By Genevieve Hoffman 7/11/10; updated in 2016

« Back to White Papers