Pay Medical and Higher Education Costs Directly
If you have wealth to share, you're in a great position to help loved ones during your lifetime or after you're gone. There's just one catch – taxes. To avoid a hefty tax burden, you may choose to gift assets gradually to your heirs. Or you may prefer to gift a lump sum to loved ones who face certain challenges or milestones in life.
If you plan to pay for college tuition or medical bills for a family member or friend, don't miss out on this underused tax strategy: Pay college or medical bills directly to the institution providing the service (rather than to the beneficiary) to avoid triggering gift taxes. Plus, the amount of the gift will not reduce your lifetime gift-tax exclusion.
Run the Numbers
When gifting money directly to loved
ones, the following limits apply:
The annual gift-tax exclusion allows you to give up to $12,000 per person to as many people as you choose each year without incurring any gift tax.* If your spouse joins you in gift-giving, you may together give up to $24,000 to each person annually. If you exceed that amount, you will begin reducing your lifetime gift-tax exclusion, which is $1 million in 2008.** Please consult with your tax advisor for details on how to best use the gift-tax exclusion for your individual situation.
Paying college or medical bills directly can pay off. Here's how:
For example, an uncle wants to help his nephew attend law school and writes the nephew a check for $32,000. Because this gift exceeds the annual gift-tax exclusion by $20,000, the uncle's lifetime exclusion is reduced by that amount. Instead, he should pay the school directly for tuition. He could also send his nephew up to $12,000 a year to help with books and living expenses. That way, neither payment is reportable for gift tax purposes.
Follow the Rules
Be sure to note the qualification
guidelines for the unlimited exclusion
of educational or medical expenses:
- Direct payments to the educational institution must be for tuition only (books, supplies, room and board or other living expenses do not qualify).
- Medical payments must be paid directly to the person or institution providing the care. Qualifying medical expenses include diagnosis and treatment of disease, procedures affecting a structure or function of the body, transportation used primarily for medical care and medical insurance.
A Gift for the Present
In addition to reducing your future
taxable estate, gifting assets can make
a real difference – right now – in the
lives of those around you. It also gives
you the opportunity to see the potential
benefits of your gift-giving in action.
To learn more about estate-planning and other strategies for tax-efficient wealth transfer, contact one of the Investment Services Representatives at Wings Financial Advisors. They will be happy to meet with you to discuss your options.
| * | This is the exclusion amount for 2008. It is scheduled to rise with inflation in future years. |
| ** | The gift tax is due when the entire $1 million lifetime gift tax amount is surpassed. |
Please consult a Wings Financial Tax Services advisor for information about your specific situation at (800) 692-2274, ext. 8249.
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