The Internal Revenue Service (IRS) watches the transfer of wealth carefully, and certain gifts can trigger gift taxes.
Nevertheless, there are 3 easy ways you can avoid IRS gift taxes:
- Understanding the annual gift tax exclusion
- Paying medical bills
- Paying college tuition costs
As long as you follow the IRS’s rules, neither you nor the person receiving your gift should owe taxes. Political and financial speculation should not stop you from making gifts that benefit your loved ones. If you have any questions, however, you should talk to your estate planning attorney.
What Is the Annual Gift Tax Exclusion?
In 2021, the annual gift tax exclusion is $15,000. This means you can gift a friend or family member $15,000 in assets or cash without owing taxes on the gift. The person who receives the gift will not owe taxes, either.
If you make a gift worth more than $15,000, you may need to pay taxes and file additional paperwork – unless some of the gift goes toward medical expenses or education.
What Is the Medical Exclusion?
Freeing someone from medical bills is one of the best gifts you can give, and you can pay medical providers without triggering gift taxes. Medical payments are unrelated to the annual gift tax exclusion, so you could give someone a gift of $15,000 and pay their medical bills without triggering taxes.
Still, not all payments qualify for the medical exclusion. For tax purposes, the payment must:
- Go directly to the individual or institution providing the medical care (or the insurance company)
- Not be reimbursed by an insurance company (insurance reimbursements will be treated as gifts if someone else paid your medical bills as a gift)
The medical exclusion works like some of the deductions on your federal income tax return. Essentially, the IRS does not usually tax medical payments. As always, you can discuss any questions or concerns you may have with your estate planning attorney.
What Is the Educational Exclusion?
The IRS does not consider paying someone else’s college tuition costs a gift, but any good student knows how much of a gift money toward their education can be. Educational exclusions are also unrelated to gift taxes and medical exclusions, so you could theoretically give someone $15,000, pay off their medical bills, and fund their college tuition in 1 year – all without triggering gift taxes.
To qualify for the educational exclusion, your payment must cover tuition only and be made out to the educational institution directly.
How to Give Gifts Without Filing a Gift Tax Return
You can give $15,000 to a friend or family member without filing a gift return. If you are married, you and your spouse may be able to double the amount of the gift. You can also pay your loved one’s medical bills or college tuition.
Essentially, the IRS does not consider sums under $15,000, direct medical payments, and tuition payments as taxable gifts.
If you want to give gifts without filing a gift tax return, avoid giving taxable gifts. Your estate planning attorney can help you determine which gifts are taxable and which gifts aren’t.
Our team at Legacy Law Centers can help you with taxes and gift-giving – now and in the future. We have been working with clients like you for the last 10 years, and we build unique solutions around each family we help.
Whether you want to plan this year’s gift giving or create a comprehensive estate plan, we are here for you.