December192022
Supercharge Non-Taxable Gifts Through Payments of Tuition and Medical Expenses
T&E Chat
Kevin Wong, CPA, MST, MSA
12.19.22 | T&E Chat
The lifetime gift and estate tax exemption will be increasing by $860,000 to $12.92 million per individual in 2023. Additionally, the annual gift tax exclusion will increase by $1,000 to $17,000. The annual increases are tied to inflation. During 2022, we have seen inflation skyrocket, and the Federal Reserve increased interest rates multiple times throughout the year. The education and medical sector will not be spared by inflation. You can supercharge your gifting by making both an annual exclusion gift and by paying your loved ones’ eligible tuition or medical expenses.
Gift tax exclusion for payments of tuition and medical expenses
Under the Internal Revenue Code Section 2503(e), certain payments made on behalf of another person for tuition and medical expenses are excluded as a taxable gift. There is no limit to the amount paid that can be excluded. However, the payments must be made directly to the educational institution or the medical care provider. It is important to note that the gift can’t be given to your loved ones so they can make the payments themselves. Reimbursing them for expenses they previously paid will also not count as an excludible gift.
The education expense exclusion is limited to tuition. The exclusion covers tuition for all grade levels, whether your loved one is in grade school or at a university working on their PhD. However, the exclusion does not cover payments for room and board, books, or other similar expenses. Tuitions paid to daycare centers, summer or education camps, or martial arts schools may also qualify if they meet certain requirements and payments are not for individual classes.
The medical expense exclusion is for qualifying medical expenses. This includes payments for medical insurance, medical services, the cost of nursing homes or assisted care facilities provided by a licensed health care provider, and transportation essential for medical care. Cosmetic surgery is not included as a qualifying medical expense unless it is to correct a birth defect or disfigurement from a disease or injury. If a medical expense is reimbursed by insurance, the medical expense will no longer be a qualifying medical expense, and the donee must reimburse the donor or the amount would be considered a taxable gift.
Conclusion
Taxpayers should consider supercharging their gifts by directly paying for their loved ones’ qualified tuition and/or medical expenses. Not only will the expense reduce your taxable estate and be gift tax-free, but it will also leave your loved ones with the peace of mind knowing they have less debt to worry about.
Questions? I can be reached at 212.331.7441 | kewong@berdon.com or contact your Berdon Advisor.
Kevin Wong is a Senior Manager in the Personal Wealth Services Group of Berdon with over 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.
