Direct Tuition and Medical Payments Under Gift-Tax Rules

How it works

Section 2503(e) puts two categories of payment outside the gift tax altogether. They are not gifts that happen to be excluded: the instructions state that these transfers are not “gifts” as that term is used on Form 709, that you need not file a Form 709 to report them, and that they should not be listed on Schedule A if you file a return for other reasons.

The educational exclusion covers an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for that individual’s education or training. Qualifying means an organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.

Two conditions do all the work. The payment must be made directly to the qualifying educational organization, and it must be for tuition. The instructions allow no exclusion for books, supplies, room and board, or other similar expenses that are not direct tuition costs. Where a payment covered something other than tuition, that portion is a gift to the individual it benefited, which the annual exclusion can still absorb if it is otherwise available.

The medical exclusion covers an amount you paid on behalf of an individual to a person or institution that provided medical care, and the payment must be made to the care provider. The care must meet the section 213(d) definition used for income tax deduction purposes: expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, for affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Amounts paid for medical insurance on behalf of any individual are also included.

Insurance reimbursement removes the exclusion to the extent of the reimbursement. The instructions state that where the donee’s insurance company reimburses a medical expense, your payment for that expense is not eligible for the medical exclusion up to the reimbursed amount, and you are considered to have made a gift to the donee of the reimbursed amount. As with tuition, any part of a payment that was not for medical care is a gift the annual exclusion may cover.

Relationship is irrelevant. The instructions say the medical and educational exclusions are allowed without regard to the relationship between you and the donee, so a grandparent, an aunt, a family friend, or an employer uses them on the same terms as a parent.

Both exclusions sit alongside the annual exclusion rather than consuming it. Paying a school or a hospital directly does not use up your $19,000 annual exclusion for that person, so a separate cash gift of up to $19,000 in the same year is still fully excluded, and neither payment touches lifetime exemption.

Reimbursing the individual is the mistake that costs the exclusion. Money handed to the student or the patient who then settles the bill is an ordinary gift, because the statutory condition is payment made directly to the institution or the provider. Contributions to a qualified tuition program fall outside the educational exclusion for the same reason, and have to rely on the annual exclusion, the five-year election, or lifetime exemption instead.