In October, we published a blog post about this year’s increase in the estate and gift lifetime exemption amount, plus the gift tax annual exclusion amount increase to $17,000. However, did you know that direct payments of educational and medical expenses are not subject to the gift tax?
For example, if an unmarried person wishes to pay for her cousin’s college tuition of $22,000, she can send payment to the college and still retain the $17,000 gift annual exclusion amount to make additional tax-free gifts to her cousin in 2023. If her cousin ends up in the hospital, she can also pay for the cousin’s medical care as well, and this would also not affect the $17,000 gift annual exclusion amount. Even if she has already made lifetime taxable gifts exceeding her lifetime exemption amount ($12.92 million in 2023), her direct payments of education and medical expenses will not be subject to the gift tax.
It is important to note that to avoid any gift tax consequences, these gifts must be direct payments. The person making the gift will need to pay the educational institution or medical provider directly—she or he cannot simply give the amount to the recipient.
If you have any questions about gift-giving, please contact our team for more information.