Many of our clients take advantage of the annual exclusion from gift tax. This is the amount that every person may give to each of as many beneficiaries as he or she wishes in a given year without incurring any gift tax and without using any of the $1,000,000 per donor lifetime gift tax exclusion amount.
The annual exclusion amount currently is $12,000. If a married couple files a gift tax return electing to “gift-split”, one spouse may give up to $24,000 per beneficiary per year. If a couple would like to give $24,000 to a beneficiary but does not want to file a gift tax return, each spouse should give a separate $12,000 gift from his or her individual account. Contributions to a Section 529 college savings plan, or a similar state plan (such as the Virginia plan), also qualify for the gift tax annual exclusion. A Section 529 Plan is a tax-favored arrangement that allows individuals to set aside funds for future college or other post-high school tuition, as well as for other expenses of higher education. Section 529 Plan investments grow tax free, and may be withdrawn tax free if used for qualified educational expenses.
Individuals wishing to take advantage of the Section 529 benefits may transfer up to five years’ worth of annual exclusion gifts to the Section 529 Plan in the first year. This means that a single donor now may transfer up to $60,000, and a married couple may transfer up to $120,000, to each Section 529 Plan. Because each Section 529 Plan is created for a separate beneficiary, persons with more than one child or grandchild may create multiple Section 529 Plans, funding each Section 529 Plan with up to $60,000 (or $120,000 for a married couple) without making a taxable gift.
Please note that a donor’s other gifts, such as contributions to irrevocable trusts to cover insurance premiums, may reduce the amount such donor may contribute to a Section 529 Plan without triggering a taxable gift. It is also important to understand that, if the donor passes away before the five-year period has expired, a portion of the gifts will be brought back into the donor’s estate for estate tax computation purposes.
Payments for medical expenses and tuition for others (related or unrelated) are not considered taxable gifts and are not subject to the annual exclusion limits. For example, a taxpayer may give a grandchild $12,000 in 2008 and may also pay any amount (e.g., $20,000) for that grandchild’s tuition at any level from pre-kindergarten to graduate school without incurring any gift tax. However, in order to be exempt from gift tax, payments for medical expenses or tuition must be paid directly to the health care provider or educational institution. (Thus, reimbursement to another for such payment is not exempt from gift tax.) “Medical expenses” include the cost of medical insurance, including long term care insurance, if paid directly to the insurance provider.