Year End Estate Planning Tip #5 – Make Gifts that Your Family Will Love but the IRS Won’t Tax

Don’t let the chaos of the holiday season prevent you from avoiding federal gift tax by making “annual exclusion” gifts, medical payments gifts, and educational gifts.

Make Annual Exclusion Gifts

“Annual exclusion” gifts are transfers of money or property in an amount that does not exceed the annual gift tax exclusion.

In 2014, the annual gift tax exclusion is $14,000 per recipient, and it will remain at $14,000 per person in 2015.  Therefore, you can give up to $14,000 to as many individuals you choose on or before December 31, 2014, and then give another $14,000 to the same people on or after January 1, 2015, and you will not have to file a federal gift tax return (IRS Form 709).  In other words, the IRS doesn’t consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all.

Married couples can take double advantage of the annual exclusion and gift $28,000 in 2014 and then another $28,000 in 2015.  But note that in some situations, a couple may still need to file a gift tax return to report any "split gifts" – they'll need to consult with their estate planning attorney or accountant to be sure. Also, you may need to file a gift tax return if you make gifts that exceed the annual exclusion amount or if you make gifts that don’t qualify for the annual exclusion – your attorney or accountant can guide you through this.

Make Payments that Qualify for the Medical Exclusion

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the medical exclusion.  

Payments that qualify for this exclusion are ones that are made directly to an institution that provides medical care to an individual or to a company that provides medical insurance to an individual.  In general, medical expenses that qualify for this exclusion are the same as those that are deductible for federal income tax purposes. 

Therefore, in 2014 you can pay for your grandchild's emergency appendectomy in the amount of $20,000 and also give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns. 

One incredibly important detail – in order to qualify for the medical exclusion you must make payment directly to the institution providing the medical care or company providing the medical insurance. If you give the money to the individual receiving 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.

Make Payments that Qualify for the Educational Exclusion

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the educational exclusion.  

Payments that qualify for this exclusion are ones that are made directly to a qualifying domestic or foreign institution as tuition for the education of an individual.

For example, in 2014 in addition to paying for your grandchild’s emergency appendectomy (see above), you can pay your grandchild's college tuition in the amount of $25,000, give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns or pay any gift tax. 

Two incredibly important details – in order to qualify for the educational exclusion

(1) You must make payment directly to the institution providing the education, not to the individual receiving the education, and

(2) Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.

If you fail to follow either of these restrictions, the payment will be considered a gift.

If you have any questions about how to make the most out of gifts to your family, please contact our office.


 To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.