Three Easy Ways to Give Money Gift Tax Free, Beyond the Annual Exclusion

Your clients have worked hard to grow their wealth. How can they give money to family and friends in such a way that it will be used as they desire?

Here Are Three Simple Methods:

• Fund a Roth or Traditional IRA
• Pay qualified medical expenses directly to the service provider
• Pay tuition expenses directly to the service provider

Funding a Roth or Traditional IRA

You can make monetary gifts by funding a child’s Roth IRA or traditional IRA. The contribution limit is $5,500 or taxable compensation for the year if compensation was less than $5,500.

If you hire one of your teenagers to do work at your office in the summer, they must earn at least $5,500 if you want to contribute the maximum to their IRA.

If your child isn’t eighteen years old, you may open the Roth or traditional IRA as their guardian. While the accounts themselves have withdrawal guidelines and tax barriers to withdrawal, you need to remember that once the beneficiary is eighteen, they can take out the money you contributed to their IRA and spend it on whatever they want. They will suffer IRS penalties and incur additional taxes, you cannot stop them from withdrawing the money. Nonetheless, it is unlikely to be withdrawn for other reasons and can start a great conversation about saving for the future.

Qualified medical expenses paid directly to the provider

Any qualified medical expenses paid directly to the service provider are not subject to Gift Tax, and thus do not use your $15,000 annual exclusion. Even if a person you care about is struck by a major illness and she incurs very large medical bills which are not covered by her health insurance plan, you can pay those medical bills and not trigger the gift tax if you pay them directly to the service provider.

Qualifying medical expenses include expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care. In addition, the unlimited exclusion from the gift tax includes amounts paid for medical insurance on behalf of any individual. The unlimited exclusion from the gift tax does not apply to amounts paid for medical care that reimbursed by the donee's insurance.

There is no cap on the amount of qualifying medical expenses you can pay. If someone you care about is in a tragic accident and they incur medical bills running into the hundreds of thousands of dollars, you can pay all those expenses as long as you pay directly to the service provider.

Tuition expenses paid directly to the provider

Paying tuition expenses directly to a qualifying educational organization is also gift tax free. While funding 529 plans can be an excellent way to help with college expenses, giving money this way might not be as useful to your very wealthy clients as it might be to your average clients. For clients with significant incomes who can simply pay tuition costs (often $45,000 or more annually) out of their cash flow, there is less reason for them to open a 529 plan. Alternatively, grandparents may pay tuition for their grandchildren free of both Gift and Generation Skipping Transfer Tax using this rule, leaving the parents free to supplement in other ways.

If you wish to pay tuition expenses gift tax free, all that is required is to pay the qualifying educational organization, such as a college or university, directly. This rule does not apply if you reimburse someone, nor does it apply to the payment of student loans. The money must go from your account to the service provider’s account without any detours. If you follow the rules when paying, you won’t trigger the gift tax.

A qualifying educational organization is one 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. The unlimited exclusion is permitted for tuition expenses of full-time or part-time students paid directly to the qualifying educational organization providing the education. No unlimited exclusion is permitted for amounts paid for books, supplies, dormitory fees, board, or other similar expenses which do not constitute direct tuition costs.

Every transaction in our business is subject to various rules and regulations which change from time to time.  Making gifts while avoiding the gift tax requires strict adherence to the rules. Details from the IRS on gifting can be found here:  IRS FAQs [1] on gift taxes.

These few points will provide you with an idea or three to discuss with your clients.

To learn more about this topic, register for our Estate, Gift and Generation-Skipping Tax Fundamentals course. 

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Contributing Writer: Subject Matter Expert Charles McCain

Resources:

[1] https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes#3