Do tuition and medical payments count against the gift tax exclusion?

By Richard C. Wilson, Founder, Family Office Club

The educational exclusion applies to tuition paid on behalf of an individual directly to a qualifying educational organization for that individual's education or training. The medical exclusion applies to payments made on behalf of an individual directly to a person providing that individual's qualifying medical care, as payment for that care.

Tuition paid to a school

A domestic or foreign school can qualify when tuition for an individual's education or training is paid directly to it and the school normally maintains a regular faculty and curriculum and a regularly enrolled student body attending where its educational activities regularly occur. Paying an education related business alone does not establish that the organization meets those requirements.

Do books, supplies, room and board qualify?

No. Books, supplies, room, board and similar expenses that are not direct tuition costs do not receive the educational exclusion, even when paid to the educational organization. A payment to the organization for those nontuition expenses is a gift to the individual who benefits from it.

The annual exclusion may offset a gift for these expenses if otherwise available. See the annual gift tax exclusion glossary entry.

Medical payments to a care provider

Direct payment to the person providing an individual's medical care qualifies only when the payment is for that individual's medical care within section 213(d). A qualifying payment is excluded from treatment as a gift rather than being charged against the annual exclusion.

Subject to the direct payment requirements above, qualifying medical care includes expenses for diagnosis, cure, mitigation, treatment or prevention of disease, or for affecting any structure or function of the body, transportation primarily for and essential to medical care, and amounts paid for medical insurance on behalf of an individual. Not every health related expense qualifies.

Does an insurance reimbursement affect the exclusion?

Yes. If the beneficiary's insurance company reimburses a medical expense paid by the donor, the donor's payment loses the medical exclusion to the extent of that reimbursement, and the reimbursed portion is treated as a gift to the beneficiary. The disqualification under this reimbursement rule applies only to the reimbursed portion.

A payment for something other than medical care is a gift to the individual on whose behalf it was made and may be offset by the annual exclusion if that exclusion is otherwise available.

For medical care boundaries, see the IRC §213 and Treasury regulation links in Resources. For annual exclusion eligibility, see the annual gift tax exclusion glossary entry.

Other expenses and tuition plans

A contribution to a qualified tuition program on behalf of a designated beneficiary does not qualify for the direct educational exclusion. The separate five year election concerns annual exclusion treatment of the contribution, rather than eligibility for the direct tuition exclusion.

Can a tuition plan contribution be spread over five years?

Yes. When a donor's aggregate qualified tuition program contributions for a designated beneficiary during a calendar year exceed that year's annual exclusion limit, the donor may elect to have the contribution taken into account for annual exclusion purposes ratably over the five year period beginning with the contribution year. If the electing donor dies before that period closes, the donor's gross estate includes the portion of the contributions properly allocable to periods after the donor's death.

For how the election interacts with other gifts, see the IRS Instructions for Form 709 in Sources. Check the instructions for the contribution year before choosing an elected amount.

How is the five year election made?

The five year tuition plan election is made on Form 709 for the contribution year by checking Schedule A, line B, and attaching an explanation stating the total contribution per beneficiary, the elected amount and the beneficiary's name. If gift splitting is elected, its rules apply first, and each spouse separately decides whether to make the tuition plan election.

Spouses may elect to treat a gift to a third person as made one half by each only when both are U.S. citizens or residents at the time of the gift, are married when the gift is made, neither remarries later that calendar year, and both consent to splitting all gifts either makes to third persons during that year while married. Gifts from one spouse to the other are not split.

Is a return required in every year of the election?

No. In any of the final four years of the five year tuition plan election, no Form 709 is needed merely to report that year's elected portion if no other gifts require a return. Otherwise, the applicable one fifth of the elected contribution is reported for each of the five years in Schedule A, Part 1 for nonskip persons or Part 2 for skip persons.

Gift tax reporting

Payments qualifying for the educational or medical exclusion do not themselves require a Form 709 filing. If the donor files Form 709 for other transfers, those excluded payments should not be listed on Schedule A.

Gift tax on a transfer required to be reported on a gift tax return but not adequately disclosed can be assessed at any time. Adequate disclosure on the return starts the regular assessment period, generally three years after the return is filed, and does not prevent assessment during that period.

Adequate disclosure reports the transfer in a manner sufficient to tell the IRS the nature of the gift and the basis for the value reported.