Momentum - Business to Business Online Magazine MOMENTUM March 2020 | Page 30
T. MARK RUSH, CPA
Partner
Ham, Langston & Brezina, LLP
[email protected]
AVOID THE GIFT TAX —
Use the Tuition and
Medical Strategy
I
f you or a well-off relative are facing the gift and
estate tax, here’s a planning opportunity often
overlooked: pay tuition and medical expenses for
loved ones. Such payments, structured correctly,
do not represent gifts. Further, the loved one who
benefits from your help does not incur any tax issues.
As unusual as this sounds, with the tuition and medical
payments, you operate in a tax-free zone.
Beating the Gift Tax with Tuition
The tuition exception to the normal gift tax
rules involves direct payment of tuition (money for
enrollment) made to an educational organization on
behalf of another individual. The unlimited benefit
here applies only to tuition for full-time and part-time
students. You can’t use it for items such as dorm fees
and books. You can’t pay the money to a trust and then
require the trust to pay a grandchild’s future tuition
costs (this fails the test for direct to the institution).
Qualifying Educational Organization
The tax code defines “educational organization” as
“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.” Regulations elaborate by
explaining that the term “educational institution”
includes primary, secondary, preparatory, or high
schools, and colleges and universities. Irrevocable
prepaid tuition meets the rules and offers planning
opportunities.
Beating the Gift Tax with Medical
The tax-free zone treatment of medical expenses
requires that you pay the money directly to the medical
care provider or insurance company (when paying for
health insurance). Under this plan, you avoid gift taxes
when you pay directly to the provider any medical
expense that would qualify as an itemized deduction
on your Form 1040. Here are the basics:
• Qualifying medical expenses are limited to those
expenses defined in Section 213(d) and include
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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
are reimbursed by the donee’s insurance. Thus, if
payment for a medical expense is reimbursed by the
donee’s insurance company, the donor’s payment
for that expense, to the extent of the reimbursed
amount, is not eligible for the unlimited exclusion
from the gift tax, and the gift is treated as having
been made on the date the reimbursement is
received by the donee.
Final Thoughts
The primary rule to remember when using the tuition
and medical gift tax-free strategy is that you must make
the payments directly to the institutions and providers.
Imbed this rule in your brain as rule one for this
strategy. Don’t violate it.