Federal Gift Tax Exclusion for Direct Payment of Medical Expenses ...

Federal Gift Tax Exclusion for Direct
Payment of Medical Expenses and Tuition
This memorandum provides you with an overview of the federal gift tax exclusion for direct
payment of medical expenses and tuition. It is intended to provide you with general information
and is not a substitute for legal advice tailored to your particular situation.
I. INTRODUCTION
This memorandum summarizes the federal gift tax rules that apply to the direct
payment of medical expenses and tuition on behalf of other individuals. We hope that you will
find it helpful, and encourage you to consult with your personal tax advisor if you have
questions regarding your particular situation. Section 2503(e) of the Internal Revenue Code
excludes the direct payment of tuition and medical expenses from federal gift tax. Those
payments do not use up any of your $1 million lifetime gift tax exemption. In addition, the
payments do not count toward the $13,000 per person “annual exclusion” gifts that you may
make each year.
II.
EXCLUSION FOR MEDICAL EXPENSES
Section 2503(e) also provides an unlimited gift tax exclusion for amounts paid directly
to a medical care provider for an individual’s medical expenses. It does not apply to medical
expenses that were previously paid by the Donee that are later reimbursed by the Donor. The
exclusion does not apply to amounts that are paid for a Donee's medical care that are later
reimbursed by the Donee's insurance. If the Donor pays a medical expense on behalf of the
Donee and the Donee is later reimbursed by his or her medical insurance, the Donor's
payment, to the extent of the reimbursement from the insurance company, is not eligible for
the gift tax exclusion. Rather, the Donor is treated as having made a gift equal to the
reimbursement amount on the date that the reimbursement is received.
To qualify for the gift tax exclusion, the medical expense must meet the definition under
Section 213(d) of the Internal Revenue Code. Medical expenses that qualify for the gift tax
exclusion include:
• ambulance services;
• chiropractic services;
• clinic costs;
• dental treatment;
• home care;
• fees for doctors and hospital services;
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Federal Gift Tax
Exclusion for Direct
Payment of Medical
Expenses and Tuition
• long term care insurance premiums;
• medical devices such as hearing aids, crutches, orthopedic shoes, elastic hosiery and
wheelchairs;
• medical insurance premiums, deductibles and coinsurance amounts;
• nursing services;
• prescription medicines;
• physical exams;
• physical therapy;
• psychological treatment;
• special education and training for physically and mentally handicapped people;
• travel costs directly related to medical care (including meals and lodging);
• vaccines;
• vision care (exams, eyeglasses and contact lenses); and
• x-ray and laboratory services
Not all medical expenses qualify. Medical expenses do not include cosmetic surgery or
other similar procedures, unless the surgery or procedure is necessary to correct a deformity
that arises from or is directly related to a congenital abnormality, a personal injury resulting
from an accident or trauma, or a disfiguring disease.
III.
GIFT TAX EXCLUSION FOR TUITION
Section 2503(e) excludes tuition payments made directly to an educational organization
on behalf of an individual from federal gift tax. The exclusion is available regardless of the
relationship between the Donor and the Donee, and is in addition to the $13,000 per Donee
annual exclusion from gift tax. For purposes of the gift tax exclusion, an "educational
organization" is one that normally maintains a regular faculty and curriculum, focuses primarily
on formal instruction, and has a regularly enrolled body of students. Educational
organizations include primary, secondary and preparatory and high schools, as well as public
and private colleges and universities.
The exclusion may or may not be available for tuition payments made directly to a
nursery, preschool, day care program or camp. In order to be eligible for the exclusion, the
program must be primarily educational rather than custodial in nature. The organization must
maintain a regular faculty and curriculum, have a regularly enrolled body of students, and have
formal instruction as its primary function. For example, a group day care program with a
regular enrollment of children aged 3-6 years, who attended five days a week throughout the
year, operated in an open classroom setting with various groups receiving different
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Federal Gift Tax
Exclusion for Direct
Payment of Medical
Expenses and Tuition
instructions, planned educational activities and problem solving, and where the instruction was
provided by a head teacher and at least two assistants for each classroom, qualified as an
educational organization. In contrast, a family day care program providing child care in the
homes of a staff of child-care trained personnel, including story reading, projects involving
science or art, letters and numbers, did not qualify as an educational organization.
The exclusion applies only to tuition expenses of full time or part time students that are
paid directly to the qualifying educational institution. Donors can pre-pay several years worth
of tuition and apply the gift exclusion if the pre-paid tuition is non-refundable. The exclusion
does not apply to tuition expenses previously paid to the educational institution by the Donee
or the Donee's parents. The exclusion does not apply if the Donor transfers funds to an
irrevocable trust and the trustees pay tuition expenses. The exclusion is not available for
amounts paid for books, supplies, dormitory fees, room and board or other expenses that do
not constitute direct tuition costs.
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