In addition to the annual exclusion we discussed in the last blog, there is also an unlimited gift tax exclusion for direct payments of some educational and medical expenses. This exception applies regardless of your relationship to the educational or medical services recipient, however, the payments must be made directly to the provider. IRS regulations define which types of payments qualify for this unlimited tax exclusion.
Educational expenses for tuition at an institution that maintains a regular facility and includes grade school, high school, and higher education qualify. However, payments for books, dormitory fees, and other similar expenses do not qualify.
Medical expenses qualify for the tax exclusion if they are incurred for diagnosis, cure, mitigation, treatment, or prevention of disease. Expenses for transportation essential to medical care and payments for medical insurance are also eligible. However, medical care reimbursed by insurance is not eligible for the exclusion.
The annual exclusion and unlimited health and education exclusion provide a simple yet effective tax savings technique. Also, remember that the earlier you begin to gift, the more that benefits from tax savings can build up!