James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist
It’s the time of year when many of us are frantically shopping online or at the mall, looking for the perfect gifts for the ones we love. But the things they might need and appreciate most aren’t always necessarily able to be boxed up and tied with a bow.
In fact, there are a couple of ways to give someone you love a gift that could be life-changing for them while also providing some tax benefits for you...
Give the Gift of Education
Financial gifts you make are generally subject to gift tax. But the IRS considers payments for tuition made to a qualified educational organization on behalf of a student to be “non-gift gifts,” which are excluded from the gift tax as well as the generation-skipping transfer tax (GSTT).
This exclusion allows you to pay an unlimited amount toward a loved one’s tuition at any level of education, from elementary school to graduate school. It’s also in addition to the annual gift tax exclusion. This makes it an excellent (and often overlooked) way to transfer wealth to your children and grandchildren while investing in their future. (Though it’s important to note that the payment can be made on behalf of anyone – it need not be a relative). It can also reduce your estate tax liability by removing the value of the payment from your gross estate.
To avoid it being a gift for gift tax purposes, the payment must meet several conditions. It must be for tuition only. Payments for costs such as supplies, books, dormitory fees, and board do not qualify for the exclusion. The payment must also be made directly to a qualified educational organization – payments made to the student will not qualify.
The educational organization must also meet several conditions in order to be considered “qualified” for the purposes of making gifts of tuition. It must maintain a regular faculty, offer a regular schedule of courses, enroll students on a regular basis, and have a place where it regularly carries out its educational activities.
One potential drawback to think about when considering making a gift of tuition is any possible negative income tax consequences for the student or student’s parents. If a dependency relationship exists between the student and another person, the tuition payment that you make will count in the calculation of the student's support. This could affect who is eligible to claim a dependency exemption for the student and could affect the parent's or student's ability to claim a personal exemption.
Lastly, if you do gift a loved one with a tuition payment made to a qualifying educational organization, be sure to get a receipt. If the IRS audits you, you may need to prove you made the payment directly to the organization.
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Give the Gift of Health and Care
As with tuition payments, payments made directly to a qualified medical provider on behalf of someone else are considered qualified transfers or “nongift gifts,” and so are excluded from the gift tax as well as the GSTT.
This exclusion allows you to pay an unlimited amount and is an addition to the annual gift tax exclusion. It can also reduce your estate tax liability by removing the value of the payment from your gross estate.
Payments must be made directly to the medical care provider and may be made for medical expenses that are deductible for income tax purposes. In general, the medical expenses must be for diagnosing, curing, treating, or preventing disease, or for treatments that affect any structure or function of the body. Treatments that lessen the effects of disease (prescriptions, for example) and medical insurance premiums may also qualify. Cosmetic surgery, general health maintenance such as annual check-ups, nonprescription medications and toiletries are a few examples of expenses that do not qualify.
Keep in mind that any amount for which the patient is reimbursed by insurance does not qualify for the exclusion and is subject to gift tax. So if you pay a person’s $10,000 hospital bill and insurance reimburses them $3,000, that $3,000 portion of your payment will be treated as a regular gift and so will be subject to gift tax.
As with gifts of tuition payments, if you make a medical payment on another’s behalf, make sure to get a receipt so that you can prove you made the payment directly to the medical provider, should you be audited.
Helping Loved Ones Live Well Requires That You PlanWell
The ability to provide support to help loved ones reach their biggest dreams and overcome their hardest challenges is one of the most meaningful rewards of building and sticking to a strong financial plan.
Watching our clients carry out those goals is certainly one of the most rewarding aspects of the financial planning and partnerships we nurture here at Weiss, Hale and Zahansky Strategic Wealth Advisors. We welcome you to contact us and see how our strategic Plan Well, Invest Well, Live Well process can help you to provide these special gifts for your loved ones now or down the road.
Presented by Principal/Managing Partner James Zahansky, AWMA®. Prepared by an independent third party for Commonwealth Financial Network®, copyright 2021. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com (http://www.whzwealth.com).