Posted On: May 3rd 2016
Now that the gift and estate tax exemption has risen to $5.45 million in 2016, taxes might not seem so much of a concern. But what if one’s wealth grows beyond the exemption amount in the coming years and decades? What if lawmakers decide to reduce the amount? This article reveals how the exemption for direct payments of tuition and medical expenses can provide a valuable opportunity to reduce potential gift and estate tax exposure down the road.
Now that the gift and estate tax exemption has risen to $5.45 million in 2016, you may be less concerned about these taxes. But if you don’t take advantage of the exemption for direct payments of tuition and medical expenses, you’re missing a valuable opportunity to reduce your potential gift and estate tax exposure down the road.
The exemption allows you to pay tuition and medical expenses on behalf of your children or other loved ones without incurring gift tax and without using up any of your exemption amount. This may not seem like much if your net worth is well under the current exemption amount. But what if your wealth grows beyond the exemption amount in the coming years and decades? What if lawmakers decide to reduce the amount? Either way, your estate could end up with a hefty tax bill, leaving less for your family.
You may already be making $14,000 per recipient annual exclusion gifts to your children, grandchildren or other loved ones, which can help minimize your estate, but you should also consider paying some or all of their tuition and medical expenses. Unlike the annual exclusion, there’s no limit on the amount of tuition or medical expenses you can pay tax-free. It’s a powerful technique for transferring wealth gift-tax-free while also reducing the size of your estate.
A few caveats: This strategy works only if you make payments directly to a qualifying educational institution or medical provider — advancing the funds to a loved one or reimbursing previously paid expenses doesn’t count. The exemption covers tuition at all grade levels, but not payments for room and board, books, supplies, or other non-tuition expenses. And it doesn’t apply to medical expenses reimbursed by insurance.
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