What Gifts Are Not Subject to the Gift Tax?
Annual Exclusion Gifts, Educational Payments, and Medical Payments
Not all transfers of property are taxable for federal gift tax purposes. You can give as much as you like to your spouse without incurring the tax, and four other types of transfers aren't considered gifts for federal gift tax purposes, either.
They include annual exclusion gifts, payments for some educational expenses, payments for medical expenses, and gifts made to certain political organizations for their use.
What Counts As a Gift?
The Internal Revenue Code (IRC) considers a gift to be any property that's transferred to a non-spouse beneficiary with no cash or other monetary value received in exchange and when no exclusion applies.
The giver of the gift must receive something in return that's equal to the gift's fair market value. The IRS defines fair market value as:
"The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."
Annual Exclusion Gifts
An annual exclusion gift qualifies for the $15,000 per person per year exemption from federal gift taxes.
Under the IRC, a transfer is not a gift as of 2019 if the value of the property transferred is $15,000 or less. This annual exclusion is indexed for inflation, so it can increase on an annual basis. But it must increase in $1,000 increments, so it sometimes sits at the same amount for a year or more before it bumps upward.
Gifts Made to Spouses
Gifts between spouses are covered by the "unlimited marital deduction." This rule states that you can give everything you own to your spouse, either during your lifetime or at your death, without incurring a gift or estate tax on the value of that property.
Spouses include those of the same sex as long as they're legally married, but not registered domestic partners or civil union partners.
Gifts made to a spouse who isn't a U.S. citizen are treated differently. These gifts have their own annual exclusion amount: $155,000 as of 2019.
Gifts Made by Spouses
Married couples can combine their annual exclusions and gift $30,000 to an individual per year without incurring any gift tax liability.
Couples still have to file a federal gift tax return using IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, to report these "split gifts," even if they limit their gift to double the annual exclusion amount.
A split gift is one that's exceeds the $15,000 per year exclusion and is divided between spouses. For example, one spouse can claim $10,000 of his annual exclusion and the other can claim $10,000 of her exclusion to cover a gift worth $20,000.
A gift tax return is due on April 15 of the year following the year in which the gift was made when it's required. Consult with a tax professional to find out if you must file if you and your spouse have given any sizable gifts to the same beneficiary during the tax year.
The Educational Exclusion
Payments made directly to a qualifying domestic or foreign learning institution for the education of an individual qualify for the educational exclusion under Section 170(b)(1)(A)(ii) of the IRC.
You can pay your child's or grandchild's college tuition in the amount of $20,000 and also give him or her an additional $15,000 in the same year without incurring any federal gift tax. A few rules apply:
- The payment must be made directly to the institution, not to the individual receiving the education.
- The payment must be for tuition only. Other expenses, such as supplies and room and board don't count.
- The school must offer a regular curriculum and faculty and have a regular body of students.
The school does not have to be post-secondary. Elementary schools and high schools count if they meet all other rules. The student does not have to be enrolled full time.
The Medical Exclusion
Payments that qualify for the medical exclusion include those made directly to a medical institution or care provider for the benefit of an individual. You can also make payment to a company that provides medical insurance to that person.
Expenses that qualify are the same as those that are deductible for income tax purposes.
You can pay for your grandchild's emergency appendectomy in the amount of $20,000 and also give your grandchild an additional $15,000 in the same year without incurring any federal gift tax.
You can also pay for transportation and lodging associated with your beneficiary receiving medical care, but certain rules apply so speak with a tax professional.
Again, the payment must be made directly to the care provider, the institution providing the medical care, or to the company providing the medical insurance. You can't give the money to the individual receiving the medical care or the insurance benefit or the payment will be considered a taxable gift if it exceeds $15,000.
Gifts to Political Organizations
These are covered under Section 527(e)(1) of the IRC. Your gift must be used for the benefit of the organization, not passed on to anyone else.
You can give to a few tax-exempt organizations as well as detailed under Section 501 of the Code. This can include civic leagues, horticultural and agricultural organizations, and labor organizations—although not labor unions. The organization must be classified as tax exempt under federal law.
Filing a Gift Tax Return
Gift tax returns are due simultaneously with your regular tax return, Form 1040. You do not have to file one if your gift meets any of these exclusion rules, but you must do so otherwise, even if your gift goes over the $15,000 limit by only $10.