There are many everyday situations in which we give gifts that aren’t subject to the federal gift tax. On the other hand, there are quite a few situations where gifts are reportable to the IRS, and they may be taxable. It’s important to know the difference. So, what types of gifts are not subject to the gift tax?
Gifts to a U.S. Citizen Spouse
If your husband or wife is a United States citizen, then you can give him or her an unlimited amount of property, tax-free, regardless of value. If your spouse is not a citizen, limits apply to the value of property that can be gifted to him or her without triggering the gift tax.
Gifts Pursuant to the Annual Exclusion
Gifts to individuals other than your spouse that total less than $13,000 per year, per recipient are neither taxable nor reportable to the IRS. If you’re married, you and your spouse can combine your $13,000 annual exclusions, and give gifts totaling up to $26,000 per year, per recipient. While these gifts are not taxable, in some situations they might be reportable to the IRS. So, if you and your spouse combine your annual exclusions, you’ll want to check with your financial advisor or attorney to determine whether or not you’ll need to file a gift tax return.
Gifts Made Pursuant to the Medical Exclusion
Direct payments from you to a medical treatment facility or to a health insurance company on behalf of the person receiving medical treatment aren’t counted for gift tax purposes. So, if your father needs heart surgery, you can make a direct payment to the hospital on his behalf, and you’ll still have your $13,000 annual exclusion available if you want to make additional gifts to him. On the other hand, if you write a check to your father to cover his medical bill, and he uses those funds to pay the hospital, then the IRS treats your payment of his medical expenses as a potentially taxable gift.
Gifts Made Pursuant to the Educational Exclusion
Similarly, tuition payments on behalf of another person are not counted for gift tax purposes, as long as they’re made directly to a qualifying educational institution. When it comes to complying with the rules governing the educational exclusion, there are two key factors: the gift must be made directly to the educational institution, and only tuition payments count. So, for instance, if you pay your niece’s college tuition directly to her school, that payment is not counted for gift tax purposes. On the other hand, payments made to cover her books, housing, or other fees are potentially subject to the gift tax.
If you’ve made sizable gifts to anyone other than your U.S. citizen spouse, and you’re unsure as to whether you’ll need to file a gift tax return, you’ll want to seek guidance from a trusted financial advisor or a qualified estate planning attorney.