Direct Gifts to Educational Institutions
In addition to the annual gift tax exclusion, a donor is allowed to make gifts (with no specific dollar limitation) that are totally excluded from the gift tax in the following circumstances:
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Payments made directly (Sec 529 plans are not direct) to an educational institution for tuition. This includes college and private primary education. It does not include books or room and board.
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Payments made directly to any person or entity providing medical care for the donee.
In both these “bonus gift tax exclusion” cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify. The tuition/medical exclusion is often overlooked, but these expenses can be quite significant.
Consider a
grandparent has fully funded a Sec 529 plan for their grandchild. Sec 529
distributions can be used for tuition, books, supplies, computers, and certain
room and board expenses. However, the bonus gift tax exclusion only applies to
tuition. So, use the Sec 529 plan funds for the other expenses and pay the
tuition directly.
Parents and grandparents interested in estate value reduction should strongly consider these gifts.