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Legal Gift Tax Avoidance

Most taxpayers know that the IRS requires you to file a gift tax return if you gift too much to an individual in a calendar year, but did you know that you can pay any amount of any individual’s educational expenses and/or medical expenses without any tax consequence?

First, let’s look at the annual gift tax exclusion and the unified credit. The annual gift tax exclusion is the total amount that one person can gift another person in the same calendar year without a tax consequence, unless that “other person” is your spouse. The unified credit is the tax-free amount you can transfer by gift now and by your estate later before a tax is due on the transfer. The unified credit is over and above both the spousal gifts and other gifts that do not exceed the annual exclusion. The annual exclusion is $14,000 for 2014 and is indexed for inflation. If the total gift(s) made to a non-spouse in any one calendar year exceeds that year’s annual exclusion, then a Form 709 U.S. Gift Tax Return must be filed to report the excess gift and apply it against your unified credit.

Now let’s talk about how to maximize your gifting and your unified credit. You can pay absolutely anyone’s qualifying educational or medical expenses by making the payment directly to the school or medical facility requiring the payment and it falls outside the rules above. Qualifying educational expenses are limited to tuition, however qualifying medical expenses include all expenses normally deductible for income taxes. That means that you can pay for your grandchild’s braces, your nephew’s tuition, your mother’s long term care insurance, or be a stranger’s Good Samaritan. The only requirement is that the person benefiting from the payment never has any possession or control of the funds. So if you have the means and the desire, you can bless others by direct payment to their school or doctor without reducing either your annual exclusions or unified credits.  You don’t even have to report it!

Now that’s a gift! Thanks, IRS!

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Sharon McAlister About Sharon McAlister

Sharon has over a decade of income tax experience and has worked in local, regional and international public accounting firms. She specializes in individual taxation and in small businesses and enjoys helping people succeed. If you have questions for Sharon, please send her an email. To see other posts by Sharon, click here.

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