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What Are Annual Exclusion Gifts?
An annual exclusion gift is one that qualifies for the current $14,000 per person annual exclusion from federal gift taxes. In other words, under the Internal Revenue Code if property is transferred from one person to a nonspouse beneficiary where no cash or other monetary value is exchanged and the value of the property so transferred is $14,000 or less, then the transfer is not a gift at all. (Note that the annual exclusion from gift taxes is indexed for inflation on an annual basis but must increase by at least $1,000, so it can sit at the same amount for several years.)
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Note that gifts made to a spouse who is a U.S. citizen are exempt from gift taxes due to the unlimited marital deduction. while gifts made to a spouse who is not a U.S. citizen have their own annual exclusion amount - $133,000 for 2009, $134,000 for 2010, $139,000 for 2012, $143,000 for 2013, and $145,000 for 2014.
What Are Payments that Qualify for the Educational Exclusion?
Payments that qualify for the educational exclusion are payments made directly to a qualifying domestic or foreign institution as tuition for the education of an individual. What does this mean? That you can pay your grandchild's college tuition in the amount of $20,000 and also give your grandchild an additional $14,000 in the same year without incurring any
federal gift tax.
The following rules must be strictly adhered to in order for payments for educational expenses to be nontaxble gifts:
- The payment must be made directly to the institution providing the education, not to the individual receiving the education.
- The payment must be made for tuition only.
So this means that if you make the payment directly to your grandchild or if you pay for books, supplies, room and board, or other other types of educational expenses, then your payment will be considered a taxable gift if it exceeds $14,000.
What Are Payments that Qualify for the Medical Exclusion?
Payments that qualify for the medical exclusion are payments made directly to an institution that provides medical care to an individual or to a company that provides medical insurance to an individual, and expenses for medical care are the same as those deductible for income tax purposes. So what does this mean? That you can pay for your grandchild's emergency appendectomy in the amount of $20,000 and also give your grandchild an additional $14,000 in the same year without incurring any federal gift tax.
But note that the payment must be made directly to the institution providing the medical care or to the company providing the medical insurance, not to the individual receiving the medical care or insurance benefit, otherwise the payment will be considered a taxable gift if it exceeds $14,000.