October 11, 2012
Gift-Tax Exclusion and Other Ways to Avoid Federal Gift Tax
Generally, each year, individuals can receive up to $13,000 as a gift without being hit by a federal gift tax. Because of cumulative indexing, this amount should rise to $14,000 per person in 2013. In addition to these annual amounts, there are two kinds of exempt, tax-free gifts that do not have a cap on the amount that can be gifted: gifts for tuition and medical expenses.
Gifts for Tuition:
The Internal Revenue Code (IRC) provides that amounts paid on behalf of an individual as tuition to educational organizations are excluded from gift-tax calculations. This exception applies regardless of the relationship between the donor and the donee. The exclusion applies to tuition costs, but not to costs for books, dorms or boarding. In order for the exclusion to apply, two requirements have to be met:
1. Tuition must be paid directly to the qualifying educational institution. It does not apply to tuition expenses that the donee pays to the educational institution that the donor reimburses. Transfers to trusts that then go to the educational organization do not count either.
2. The school the donor pays the tuition to must be a qualified educational organization, which is defined in part as one that maintains a regular faculty and curriculum and has students that attend where its educational activities are carried. The primary function of the educational institution must be offering formal instruction, and it does not include organizations engaged in both educational and non-educational activities unless the non-educational activities are just incidental to the educational ones.
Section 2503(e) of the IRC allows for an unlimited gift-tax exclusion for amounts that a donor pays directly to a provider for qualified medical expenses. The IRC lays out some limitations to this allowance.
See Ray Martin, Gift-tax Limits To Rise in 2013, CBSnews, Oct. 10, 2012.
Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.
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