Avoid Gift Treatment by Paying Expenses Directly
Brought to you by Stephen T GENTILE CPA
The annual exclusion for gifts remains at $14,000 for 2015(married couples can gift up to $28,000 combined). This limit applies to the total of all gifts, including birthday and holiday gifts, made to the same individual during the year. However any payment made directly to the medical care provider or educational organization for tuition is not subject to the gift tax and, therefore, is not included in the $14,000 limit.
So when paying tuition or large medical bills for parents, grandchildren or any other person who is not your dependent minor child be sure to make the payment directly to the organization or service provider. Don’t give the funds to the parent or other individual first and have them pay the school, doctor or hospital. By doing so, you have made a gift to that person, subject to the $14,000 limit. In summary, make direct payments to schools or medical providers and avoid taxable gifts that could be subject to the gift tax or reduce the payer’s unified credit.
Caution: Direct payments of tuition reduce the student’s eligibility for financial aid on a dollar-for-dollar basis. However, if the gift were made directly to the student, only 20% of the gifted assets would be counted as assets of the student for financial aid purposes. Accordingly, careful analysis of the trade-offs between the gift tax exclusion and impairment of financial aid eligibility should be considered.
Gentile Stephen T CPA 109 Airport Rd Warwick, RI 02889 (401) 739-6110