If you’re lucky enough to be in a position to be able to give substantial amounts of money to your loved ones each year, you may find yourself with a gift tax problem.
According to IRS rules, you can give someone else up to $14,000 each year tax-free ($28,000 if you’re married). You can give more than that without paying gift tax, but only up to a certain amount over your lifetime ($5.49 million in 2017). Once you have given more than that, you’ll owe tax on gifts you give to others. But there are a couple ways you can give more and avoid that hefty tax bill.
YOU CAN MAKE TUITION PAYMENTS
You can cover the cost of tuition for education without it counting against the annual amount you can give someone each year. That’s all levels of education, not just college. You can pay for elementary school, high school, an online school or trade school. You may even be able to pay nursery or preschool if it meets certain qualifications. The rule? It must be "an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on."
One caveat: A tuition gift must be made directly to the school on behalf of a particular student, and the money is not refundable. That means if your college-age grandson transfers to a different campus, or your granddaughter's parents move to a new city midway through her freshman year of high school, you can’t get back any tuition you have already paid. For this reason, most people who take advantage of this option don't pre-pay tuition years in advance, but rather pay one year, one semester or one month at a time.
You can't reimburse someone for expenses already incurred.
YOU CAN PAY FOR MEDICAL CARE
There are certain medical expenses that you can pay for on behalf of someone else without running into a gift tax problem. Those expenses have to be in "the diagnosis, cure, mitigation, treatment, or prevention of disease" and which are not covered by insurance. The exclusion also includes payments for medical insurance. And you have to pay the health care provider or health insurer directly.
If you want to take advantage of the medical or tuition gift tax exclusions, it’s a good idea to work with your accountant or tax attorney in advance to make sure you're clear on what can and cannot be considered an excluded gift.
Whether you're covering medical expenses or picking up the tab for tuition, you're allowed to make these gifts to anyone; it doesn't have to be a dependent or relative. And your generosity won’t affect your annual gift-giving limit.