Gift-tax limits to rise in 2013
(MoneyWatch) Individuals can generally receive up to $13,000 a year as a gift without getting hit by a federal gift tax. In 2013, as a result of cumulative indexing, this amount is projected to increase to $14,000 per person. Parents also may use the technique of "gift splitting," or combining gifts to a child, so that each makes a gift of $13,000 ($14,000 in 2013), which amounts to $26,000 in tax-free gifts ($28,000 in 2013) per year.
In addition to these annual amounts, there are two specific types of exempt, tax-free gifts where there is no limit on how much a person can receive. Folks who make gifts as part of their estate planning should keep these techniques in mind.
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Gifts for tuition
The Internal Revenue Code provides a gift-tax exclusion for amounts paid on behalf of an individual as tuition to educational organizations. The exclusion is available regardless of the relationship between the donor (the person making the gift) and donee (the person getting or benefiting from the gift) and is in addition to the annual $13,000 per person per year gift-tax exclusion. The exclusion only applies to tuition costs and does not apply to amounts paid for books, supplies, dormitory fees, board or other similar expenses that do not constitute direct tuition costs. In order for the exclusion to apply, both of the following requirements must be met:
1. The tuition must be paid directly to the qualifying educational institution providing the education. It does not apply to tuition expenses previously paid to the qualifying educational institution by the donee, which are reimbursed by the donor. In addition, if funds are transferred by the donor to a trust providing for distributions to be made by the trustee for tuition expenses incurred by a trust beneficiary, the transfer is not a direct transfer to an educational organization and thus does not qualify for the exclusion. Payments for books, supplies, dormitory fees, board and related expenses do not qualify for this special exclusion.
2. The school to which the tuition is paid must be a qualified educational organization. That is one that maintains a regular faculty and curriculum and has students that attend where its educational activities are carried. Additionally, the primary function of the educational institution must be to offer formal instruction. Finally, the term "educational institution" includes institutions such as primary, secondary, preparatory or high schools, and colleges and universities. It includes federal, state and other publicly supported schools that otherwise come within the definition. It does not include organizations engaged in both educational and non-educational activities, unless the non-educational activities are merely incidental to the educational ones. Also note that reimbursements for prior tuition will not qualify.
Medical expenses
Section 2503(e) of the Internal Revenue Code also provides an unlimited gift-tax exclusion for amounts paid on behalf of a donee directly to a provider for qualified medical expenses. The exclusion is available for payments for medical insurance paid by the donor on behalf of the donee, but not with respect to medical expenses previously paid by the donee that are reimbursed by the donor. Also, the exclusion does not apply to medical expenses of the donee that are reimbursed by the donee's insurance.
Accordingly, if a donor pays a medical bill of the donee, and the donee is reimbursed by his or her insurance company, the donor's payment is not eligible for the exclusion. In such situations, the donor is viewed as having made a gift on the date of the reimbursement.
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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