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What Is It?

Your payment of someone else's medical expenses is a qualified transfer (a nongift gift). The IRS allows you to make this type of gift without incurring the federal gift tax or the federal generation-skipping transfer tax (GSTT). The payment must be (1) for qualified medical care and (2) made directly to the medical care provider. This exclusion allows you to pay an unlimited amount and is an addition to the annual gift tax exclusion. Often overlooked, this exclusion is a great way to transfer wealth to parents, children, and grandchildren.

When Can It Be Used?

When Payment Is For Qualified Medical Care

The exclusion applies only to medical expenses that are deductible for income tax purposes. In general, the medical expenses must be for diagnosing, curing, treating, or preventing disease, or for treatments that affect any structure or function of the body.

You can also include payments you make for treatments that lessen the effects of disease (for example, prescription painkillers) or for any medical insurance premiums that you pay.

When Payment Is Made Directly to the Medical Care Provider

The payment can be made on behalf of anyone (that is, it need not be a relative), but you must make the payment directly to the medical care provider. Payments you make to the patient will not qualify.

Strengths

Allows You to Make a Tax-Free Gift

Generally, gifts you make are subject to gift tax. The IRS considers payments for qualified medical services made to a medical service provider on behalf of a patient to be nongift gifts, not subject to a gift tax or generation-skipping transfer tax. This can be a great way to transfer wealth to your parents, children, and grandchildren.

Allows You to Save Your Applicable Exclusion Amount

You are allowed to pass a certain amount of your property free of federal gift and estate taxes under the applicable exclusion amount (the amount that can be sheltered from gift tax and estate tax by the unified credit). Because gifts of medical care are not subject to gift tax, you don't need to use the applicable exclusion amount to offset these gifts.

Allows You to Stretch The Annual Gift Tax Exclusion

Because gifts of medical care are not considered gifts for gift tax purposes, you can still give the patient up to $15,000 (in 2020) tax free under the annual gift tax exclusion.

May Reduce Estate Tax Liabilities

Making a gift of medical care can reduce your estate tax liability by removing the value of the payment from your gross taxable estate.

Allows You to Provide Medical Care for Someone Who Needs It

Paying for another's medical care can be a personally gratifying act. It can also be a great way to insure that your elderly parents or other loved ones receive the care that they deserve.

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Tradeoffs

Does Not Apply To Amounts Reimbursed By Insurance

Any amount for which the patient is reimbursed by insurance does not qualify for the exclusion and is subject to gift tax.

Example(s): Chet makes a $15,000 payment to the hospital to cover the medical expenses of his neighbor's live-in maid, Sandi. Sandi's medical insurance reimburses her $6,000, which does not qualify for the exclusion. $6,000 is treated as a regular gift to Sandi, subject to gift tax.

Does Not Apply to Some Types of Medical Expenses

The exclusion applies only to medical expenses that are deductible for income tax purposes. The IRS will not allow you to make a tax-free medical care gift for other types of expenses. The most common examples include:

  • Cosmetic surgery
  • General health maintenance (e.g., annual checkups)
  • Treatments or operations that are illegal
  • Nonprescription medications and toiletries

How to Do It

Make the Gift Directly to the Medical Care Provider

To qualify, you must make the payment directly to the medical care provider. Giving the payment to the patient or to a trust on behalf of the patient will not qualify.

Example(s): Sandi needs to have her appendix removed. She has the operation at Medical Center. Chet, her neighbor, wants to pay for her care tax free. To qualify, Chet makes his check payable to Medical Center, not to Sandi.

Get a Receipt

If the IRS audits you, you may have to prove that you made the payment directly to the medical care provider. Therefore, get a receipt and keep it with your tax records for that year.

Tax Considerations

Gift and Estate Tax Avoids Gift and Generation-Skipping Transfer Taxes

Payments of medical care for another person, no matter for whom and no matter the size, are not regular gifts and are not reported at all on the federal gift tax or federal generation-skipping transfer tax returns, as long as payments are made directly to the medical care provider. It also allows you to stretch the annual gift tax exclusion.

May Reduce Estate Tax Liabilities

Making the gift can reduce your estate tax liability by removing the value of the payment from your gross estate. It also allows you to save the applicable exclusion amount.

Questions & Answers

Do Payments For Medical Insurance Premiums Qualify For The Exclusion?

Yes, as long as you make the payment directly to the insurance carrier and not to the insured.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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