The "Med-Ed" Exemption from Gift Tax

 

Lisa Nachmias Davis

Davis O'Sullivan & Priest LLC

129 Church Street, Suite 805

New Haven, CT 06510

203-776-4400

davis@sharinglaw.net

www.sharinglaw.net

READ THE DISCLAIMER!!

(last updated May 30, 2014)

 

      Direct payments for someone's educational or medical expenses are exempt from the federal gift tax, without regard to the annual exclusion limitation ($14,000/year in 2014).  In Connecticut, that means they are also exempt from Connecticut gift tax.  (Keep in mind that a CT resident may give $2 million in TAXABLE gifts without paying a dime of gift tax -- the federal limit is now (1/1/2014) $5.34 million.) In other words, if you really want to "reduce your estate" by making gifts, then tax-free, each of you could give $14,000 to each of your children, each of your grandchildren, and each of their spouses, and in addition, pay tuition for each of the grandchildren and in addition, pay directly for everybody's health insurance premiums, doctor bills, pharmacy bills, and hospital bills -- provided payments are made directly to the source of the service, rather than as a reimbursement.   

 

      What's the authority for this statement?  

 

      Section 2503(e)(2) of the Internal Revenue Code excludes from the definition of a "gift" subject to tax "any amount paid on behalf of an individual (A) as tuition to an educational organization described in section 170(b)(1)(A)(ii) for the education or training of such individual, or (B) to any person ["person" includes corporations] who provides medical care (as defined in section 213(d)) with respect to such individual as payment for such medical care."

 

      "Tuition" seems straightford enough.  Books, etc. will not qualify because the payment is not for "tuition."  The IRS did clarify that payment into a "pre-paid tuition plan" also qualifies.  The reference to 170(b)(1)(A)(ii) means that the institution has to be tax-exempt, but most educational institutions in the U.S. are tax-exempt.

 

      A little more tricky is the term "medical care."  It covers more than you might think!  What does the Tax Code mean when it says "medical care (as defined in section 213(d))"? 

 

      The short answer -- anything that the person getting the "care" could have been entitled to deduct (above the usual 7% threshold) as a medical expense on his or her income tax return.  That does include doctor, nursing home, and hospital bills, travel to get the care (e.g. the airfare from California to Sloane-Kettering if that's the only place to get the procedure done), prescription medicine, and health insurance, but does not include cosmetic surgery except in certain cases (following an injury; correcting a deformity; etc.) and only limited amounts for long-term care coverage.  Whether or not it includes nursing home or assisted living expenses may depend on the person's condition. 

 

      The long answer starts here, and if your eyes glaze over, you can always check with your accountant or tax-preparer:

 

Internal Revenue Code Section 213(d) Definitions

 

      For purposes of this section -

 

        (1) The term "medical care" means amounts paid -

 

                (A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

 

                (B) for transportation primarily for and essential to medical care referred to in subparagraph (A),

 

                (C) for qualified long-term care services (as defined in section 7702B(c)), or

 

                (D) for insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged)  covering medical care referred to in subparagraphs (A) and (B) or for any qualified long-term care insurance contract (as defined in section 7702B(b)).  In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D).

 

        (2) Amounts paid for certain lodging away from home treated as paid for medical care. - Amounts paid for lodging (not lavish or extravagant under the circumstances) while away from home primarily for and essential to medical care referred to in paragraph (1)(A) shall be treated as amounts paid for medical care if -

 

          (A) the medical care referred to in paragraph (1)(A) is provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, a licensed hospital), and

 

          (B) there is no significant element of personal pleasure, recreation, or vacation in the travel away from home.

 

      The amount taken into account under the preceding sentence shall not exceed $50 for each night for each individual.

 

        (3) Prescribed drug. - The term "prescribed drug" means a drug or biological which requires a prescription of a physician for its use by an individual.

 

        (4) Physician. - The term "physician" has the meaning given to such term by section 1861(r) of the Social Security Act (42 U.S.C. 1395x(r)).

 

        (5) Special rule in the case of child of divorced parents, etc.   - Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this section.

 

        (6) In the case of an insurance contract under which amounts are payable for other than medical care referred to in subparagraphs (A), (B), and (C) of paragraph (1) -

 

                (A) no amount shall be treated as paid for insurance to which paragraph (1)(D) applies unless the charge for such insurance is either separately stated in the contract, or furnished to the policyholder by the insurance company in a separate statement,

 

                (B) the amount taken into account as the amount paid for such insurance shall not exceed such charge, and

 

                (C) no amount shall be treated as paid for such insurance if the amount specified in the contract (or furnished to the policyholder by the insurance company in a separate statement) as the charge for such insurance is unreasonably large in relation to the total charges under the contract.

 

        (7) Subject to the limitations of paragraph (6), premiums paid during the taxable year by a taxpayer before he attains the age of 65 for insurance covering medical care (within the meaning of subparagraphs (A), (B), and (C) of paragraph (1)) for the taxpayer, his spouse, or a dependent after the taxpayer attains the age of 65 shall be treated as expenses paid during the taxable year for insurance which constitutes medical care if premiums for such insurance are payable (on a level payment basis) under the contract for a period of 10 years or more or until the year in which the taxpayer attains the age of 65 (but in no case for a period of less than 5 years).

 

        (8) [Not relevant] .

 

        (9) Cosmetic surgery. -

 

                (A) In general. - The term "medical care" does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.

 

                (B) Cosmetic surgery defined. - For purposes of this paragraph, the term "cosmetic surgery" means any procedure which is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.

 

        (10) Eligible long-term care premiums. -

 

                (A) In general. - For purposes of this section, the term "eligible long-term care premiums" means the amount paid during a taxable year for any qualified long-term care insurance contract (as defined in section 7702B(b)) covering an individual, to the extent such amount does not exceed the limitation determined under the following table [NOTE -- THIS IS ADJUSTED ANNUALLY AND THE FIGURES SHOWN APPLY TO 1997, SO CHECK WITH AN ACCOUNTANT OR TAX PREPARER]:

 

 

In the case of an individual
with an attained age before the
close of the taxable year of
40 or less

 

 

 

The limitation is:

 

 

 

$200

 

More than 40 but not more than 50

 

$375

 

More than 50 but not more than 60

 

$750

 

More than 60 but not more than 70

 

$2,000

 

More than 70 but not more than 80

 

$2,500

 

 

 

 

 

*     *    *

 

        (11) Certain payments to relatives treated as not paid for medical care. - An amount paid for a qualified long-term care service (as defined in section 7702B(c)) provided to an individual shall be treated as not paid for medical care if such service is provided -

 

                (A) by the spouse of the individual or by a relative (directly or through a partnership, corporation, or other entity) unless the service is provided by a licensed professional with respect to such service, or

 

                (B) by a corporation or partnership which is related (within the meaning of section 267(b) or 707(b)) to the individual.

 

      For purposes of this paragraph, the term "relative" means an individual bearing a relationship to the individual which is described in any of subparagraphs (A) through (G) of section 152(d)(2). This paragraph shall not apply for purposes of section 105(b) with respect to reimbursements through insurance.

 

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      In addition to the Internal Revenue Code, IRS regulations (26 Code of Federal Regulations 1.213-1)  give some examples (not an exclusive list):

 

         hospital services

         nursing services (including nurses' board where paid by the taxpayer)

         medical, laboratory, surgical, dental and other diagnostic and healing services

         X-rays

         medicine and drugs

         artificial teeth or limbs

         ambulance hire

         eye glasses

         a seeing eye dog

         artificial teeth and limbs

         a wheel chair

         crutches

         an inclinator or an air conditioner which is detachable from the property and purchased only for the use of a sick person

         in-patient hospital care (including the cost of meals and lodging therein)

         institutional care for a person who is mentally ill and unsafe when left alone

         the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living, such as a school for the teaching of braille or lip reading

         cost of care and supervision, or of treatment and training, of a mentally retarded or physically handicapped individual at an institution

 

 

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THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.  NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN.  PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.  ALSO:  I can only provide general information, and will not provide advice about a particular case without a formal engagement. Writing to me does not create an attorney-client relationship.