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 28 MOMENTUM 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.