Congress has various taxing systems in place to tax the transfer of wealth, both during your lifetime and after you pass away. There are certain transfers you can make, however, without incurring any tax.  

Annual Exclusion Gifts

Each year, you can give up to an amount set by law, called the annual gift tax exclusion, to as many people as you choose without incurring any tax. The annual exclusion amount is $15,000 for gifts made in 2021 and is adjusted from time to time based on inflation. 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 and no federal gift tax return (Internal Revenue Service Form 709) is required. 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.

Together, married couples can gift up to $30,000 in 2021 to various individuals. In some situations, a couple may 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.

Payments That Qualify for the Medical Exclusion

Another exclusion granted by the IRS is the medical exclusion. 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. Such payments are not considered to be gifts at all. 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 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 a gift having been made on the date the individual received the reimbursement.

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, 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 loved ones. The gifts can be far more effective when structured in a way that the IRS chooses not to tax. 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.