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Gift Tax Exclusion for Tuition or Medical Expenses

11 October 2019
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By Cowles Liipfert

Want to make gifts for certain medical or educational expenses?  Gifts may be made for these purposes, separate and apart from annual exclusion gifts for gift and GST tax purposes, but there is a separate set of rules which apply to these gifts.

Under Section 2503€ of the Internal Revenue Code, tuition payments made directly to an educational organization on behalf of an individual are not treated as taxable gifts for gift tax purposes.  Also, certain qualifying medical expenses are not to be considered as taxable gifts, if paid directly to a medical provider.

Tuition Expenses

The education expense exemption from gift tax is limited to tuition“Tuition” means the amount of money required for enrollment, including tuition for part-time students.  There is a “grey area” for boarding schools; which do not break out the enrollment fees between teaching-related fees and room and board – and charge only one fee for both.  Some tax advisers recommend treating the entire payment as a tuition fee and claiming a gift tax exclusion for the entire amount; some may be more conservative and either not claim an exemption or only a partial exemption – but the IRS could challenge that in the future.

A school would not qualify for the gift tax exclusion unless it normally maintains a regular faculty and curriculum and has a regularly-enrolled body of students in attendance at the place where the activities are being performed, for presentation of formal instruction.  We do not encourage someone to use this gift tax exclusion as a means of paying a parent to home-school.

The Treasury Regulations specify that “educational organization” includes primary, secondary, preparatory schools, high schools, colleges and universities.  There is a “grey area” concerning nursery schools and preschools, depending on the facts. There have been Private Rulings finding a children’s day care center to be an educational organization because it had regular enrollment and instruction, a staff of teachers and assistants, planned educational activities, etc.  Another day care center did not qualify for the gift tax exclusion because it was deemed to be more custodial than educational.  

A martial arts school, a school for yoga and a wilderness camping and survival program for children with emotional and behavioral problems have all found to qualify.

Medical Expenses

The gift tax exclusion applies to payments for diagnosis, cure. Mitigation, treatment or prevention of disease, or for the purpose of any structure or function of the body, as well as for transportation, primarily for and essential to medical care.

Payments for medical insurance are covered.

The terms “medical care” includes long-term care, such as the cost of a nursing home or long-term care facility, if provided by a licensed health care provider. 

If medical insurance later reimburses for the payment, then the initial payment will not qualify for the gift tax exclusion. 

Direct Payment

In case of both medical and tuition expenses, the payment must be made directly to the provider and may not be made by giving the done a cash gift with the understanding that the done will in turn make those payments.







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