The Legal Corner by Sam A. Moak: Gifts to Your Family the IRS Won’t Tax

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The information in this column is not intended as legal advice but to provide a general understanding of the law.  Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstances.

Don’t allow ongoing political and financial uncertainties to hold you back from providing tax-free gifts that can benefit your family. Despite the speculation surrounding these matters, you still have the opportunity to make tax-free annual exclusion, medical-payment, and educational gifts.

By taking advantage of these gift options, you can support and contribute to the well-being and education of your loved ones without worrying about any tax implications.

Annual Exclusion Gifts

These are simply gifts of money or property that fall below a certain value.  For the year 2023, the value is set at $17,000 per person.  So you can give up to $17,000 to as many people as you want without having to worry about gift taxes.  If you’re married, you and your spouse can even double the advantage and gift up to $34,000.

The good news is that the IRS doesn’t consider these gifts as taxable, meaning you don’t have to report them on your federal gift tax return.

However, if your gifts exceed the annual exclusion amount or don’t meet the requirements, you may need to file a gift tax return.  There are also special situations where you need to file a gift tax return, so consult with an estate planning attorney to be sure.

Medical Exclusion Gifts

Paying for someone’s medical expenses directly to the provider or insurance company can quality for medical exclusion.  The IRS doesn’t consider these payments as gifts for gift tax purposes. This means that in 2023, if you pay for your grandchild’s medical expenses, you can still give them an additional $17,000 without having to worry about filing any gift tax returns.

The types of medical expenses that qualify for this exclusion are generally the same ones that can be deducted for federal income tax purposes.

Also, take note of these important requirements:

Pay the person or institution that provided the medical care directly.  Otherwise, the payment will be seen as a gift to that individual and not as payment for a qualified medical expense.

The amount you pay must not have already been reimbursed by the individual’s insurance company.  If any portion of the expense has been reimbursed, that reimbursed amount is not eligible for the unlimited medical exclusion from the gift tax.  Instead, it will be treated as if it was given on the date the individual received the reimbursement.

Educational Exclusion Gifts

Similar to the medical exclusion gift , paying for someone’s educational expenses, such as their college tuition, qualifies for the education exclusion.  The IRS does not consider it to be a gift for gift tax purposes.

For the payment to qualify, you also needs to meet 2 critical requirement:

Pay the institution providing the education rather than to the individual receiving the education.

The payment must be for tuition only.  It does not apply to miscellaneous expenses such as dormitory fees, books, and other similar education-related expenses.

Minimize the Impact on your Tax Liability

Providing financial assistance through these gift options can help you care for your family and minimize tax liability.  If you have any inquiries regarding the process of giving monetary or property gifts to your family, please do not hesitate to contact your estate planning attorney or tax consultant. 

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C.  He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.©