The days are flying by, and before you know it, the New Year will be here. Plan ahead and fine-tune your gift giving before the holiday chaos ensues. It’s possible to make annual, medical, and educational exclusion gifts that aren’t technically considered as such under federal gift tax law.
Annual exclusion gifts are one type that you can give that do not trigger federal gift tax. For the year 2022, the gift tax threshold is $16,000 per person. That is expected to increase to $17,000 in 2023.
With annual exclusion gifts, assets amounting to $16,000 or less that are given to an individual within the calendar year are not considered gifts (for tax purposes at least – the recipients will still be thankful!).
Hypothetically, that means you can gift assets amounting to $16,000 or less to as many individuals you’d like up to December 31st of this year, then follow that gifting criteria again for the same recipients on January 1st, 2023 without having to file them under federal gift tax law.
Some sources may indicate that married couples are able to effectively double the annual exclusion amount ($32,000 per calendar year). Even if a married couple abides by this threshold, in some cases they may still be required to file a gift tax return. We recommend consulting our estate planning services to see if you need to report these “split gifts”, as they’re referred to.
Qualified medical exclusion payments / gifts are another type of transfer that aren’t considered ‘gifts’ under federal tax law.
To take advantage of medical exclusions, one must make a payment directly to a healthcare institution or medical insurance provider. Generally, this exclusion can be applied to any medical expense qualifying for a deduction under federal income tax guidelines.
For instance, you could have given $20,000 to the hospital that your grandchild was treated in for an emergency procedure earlier in the year, then give the same grandchild up to an additional $16,000 amount before December 31st, 2022. You could even go as far as to gift another $16,000 on January 1st, 2023. Even in this extreme example, these gifts would not trigger the federal gift tax threshold, as long as they are accounted for and transferred with the exclusions in mind.
An important note: the medical exclusion gift / payment must be made directly to the medical institution or medical insurance provider, not the individual receiving the medical care or insurance money. Even if the payment is “earmarked”, the patient cannot touch it, or the federal tax law will kick in and consider it a gift.
Gifted assets that meet the criteria of educational exclusions are another type of transfer that aren’t considered ‘gifts’ under federal tax law. This includes qualifying payments made directly to both domestic and foreign institutions.
So hypothetically, you could pay for your grandchild’s emergency procedure (referenced above), pay for their educational tuition amounting to $25,000, give them an additional $16,000 by December 31st, then give them $16,000 on January 1st, 2023. That’d be one thankful grandchild, and you likely wouldn’t trigger any federal gift tax returns.
Remember two things before initiating an educational exclusion gift: First, the payment must be made directly to the educational institution, not to the individual enrolled. Next, the payment can only be put towards tuition. Not supplies, books, dorm payments, or other related educational expenses.
It can be exciting to gift money and property to loved ones. After all, they will carry on your legacy in the future. While it’s tempting to simply transfer it to the recipient’s bank account, consider the guidelines surrounding annual, medical, and educational exclusion gifts to avoid the burden of taxes and maximize your financial picture. For assistance in doing so, contact the experienced Reno estate planning attorneys at Anderson, Dorn & Rader. We are happy to walk you through the process to make it enjoyable for all parties involved.