Two Ways to Maximize Your Financial Gifts
If your financial goals include gifting assets to others, you may be aware that the IRS imposes limits on the amount you can give each year without paying taxes. In 2024, each individual may give up to $18,000 per recipient during the calendar year without paying gift tax. Married couples may give up to $36,000 per recipient, per year.
Typically, directly paying a bill or other expense on behalf of someone else counts as a gift, and any amount paid applies toward the annual gift tax exclusion limit. However, there are two notable exceptions to this rule that don’t count toward the exclusion amount. Using these exceptions can help you maximize your annual tax-exempt gifts.
#1 – Qualified education expenses
School tuition payments made directly to an educational institution don’t count toward the annual gift tax exclusion amount. That means you can pay an unlimited amount toward a loved one’s tuition without being subject to tax, with two important caveats:
- The payment must be made directly to the school. Money given to the student would count as a gift and may be subject to gift tax.
- The exclusion applies only to tuition expenses. Payments to cover room and board, books and other school supplies cannot be excluded for gift tax purposes.
Example: Susan’s granddaughter, Emma, is heading off to college, and Susan wishes to help cover her education expenses. Susan pays $25,000 directly to Emma’s college to cover her tuition. The $25,000 isn’t considered a gift because it was paid directly to the school. Susan is still eligible to give Emma up to $18,000 during the year without exceeding the annual gift tax exclusion limit.
#2 – Medical expenses
Similar to education expenses, medical expenses paid directly to a healthcare provider, hospital or insurance company aren’t counted toward the annual exclusion amount, with two notable requirements:
- The payment must be made directly to the provider or insurance company. Money given to the patient would count as a gift and may be subject to gift tax.
- The exclusion applies only to medical expenses. Additional expenses, such as travel and lodging, aren’t eligible.
Example: Bob’s 23-year-old daughter had an unexpected accident and broke her leg. She received a large hospital bill for her treatment that she is unable to pay. Bob wants to help cover the expense, so he pays the bill on his daughter’s behalf. The payment isn’t considered a gift because it was paid directly to the hospital, and Bob is still eligible to give his daughter up to $18,000 during the year without exceeding the annual gift tax exclusion limit.
Do you have questions about your gifting strategy? Creative Planning is here for you. Our experienced teams work together to help ensure your financial life is optimized and working to achieve your personal financial goals. To learn more, schedule a call with a member of our team.
