By paying for a friend or family member’s medical expenses, you can help someone in need while also reducing the size of your taxable estate. Paying someone else’s medical expenses is categorized as a qualified transfer—or in other words, a “non-gift” gift. This means that the IRS allows you to make this type of gift without incurring the federal gift tax or the federal generation-skipping transfer tax (GSTT).

To be considered a qualified transfer, the payment must be (1) for qualified medical care and (2) made directly to the medical care provider. This exclusion allows you to pay an unlimited amount and is an addition to the annual gift tax exclusion. Often overlooked, this exclusion is a great way to transfer wealth to parents, children and grandchildren.

When can it be used?

• When payment is for qualified medical care. The exclusion applies only to medical expenses that are deductible for income tax purposes. In general, the medical expenses must be for diagnosing, curing, treating or preventing disease, or for treatments that affect any structure or function of the body. You can also include payments you make for treatments that lessen the effects of disease or for any medical insurance premiums that you pay.
• When payment is made directly to the medical care provider. Payments for medical insurance premiums qualify for the exclusion as long as you make the payment directly to the insurance carrier and not to the insured. The payment can be made on behalf of anyone (it does not have to be a relative), but you must make the payment directly to the medical care provider. Payments you make to the patient will not qualify.

Benefits

• Allows you to make a tax-free gift. Gifts you make in excess of the annual exclusion (currently $17,000 in 2023), result in the reduction of your gift and estate tax exemption. The IRS considers payments for qualified medical services made to a medical service provider on behalf of a patient to be “non-gift” gifts, and thus not subject to a gift tax or generation-skipping transfer tax.
• Allows you to save your applicable exclusion amount. You are allowed to pass a certain amount of your property free of federal gift and estate taxes under the applicable exclusion amount (i.e., the amount that can be sheltered from gift tax and estate tax by the unified credit). Because gifts of medical care are not subject to gift tax, you don't need to use the applicable exclusion amount to offset these gifts.
• Allows you to stretch the annual gift tax exclusion. Because gifts of medical care are not considered gifts for gift tax purposes, you can still give the patient up to $17,000 in 2023 (or $34,000 per married couple in 2023) tax free under the annual gift tax exclusion.
• May reduce estate tax liabilities. Making a gift of medical care can reduce your estate tax liability by removing the value of the payment from your gross taxable estate.
• Allows you to cover the costs of medical care for someone who needs it. Paying for another’s medical care can be a personally gratifying act. It can also be a great way to ensure that your elderly parents or other loved ones receive the care that they deserve.

Tradeoffs

• Does not apply to amounts reimbursed by insurance. Any amount for which the patient is reimbursed by insurance does not qualify for the exclusion and is subject to gift tax. For example, if you make a $16,000 payment to the hospital to cover the medical expenses of your neighbor, and their medical insurance reimburses them $7,000, that reimbursed amount does not qualify for the exclusion. So, $7,000 of the $16,000 gift would be treated as a regular gift.
• Does not apply to some types of medical expenses. The exclusion applies only to medical expenses that are deductible for income tax purposes. The IRS will not allow you to make a tax-free medical care gift for other types of expenses. The most common examples include cosmetic surgery, general health maintenance (i.e., annual checkups), illegal treatments or operations and non-prescription medications and toiletries.

How To Do It

• Make the gift directly to the medical care provider. To qualify, you must make the payment directly to the medical care provider. Giving the payment to the patient or to a trust on behalf of the patient will not qualify.
• Get a receipt. If the IRS audits you, you may have to prove that you made the payment directly to the medical care provider. Therefore, obtain a receipt and keep it with your tax records for that year.

Conclusion

Whether you’re looking to transfer wealth or simply looking to help someone get the care they need, making a tax-free gift of their medical expenses directly to the service provider can be a good way to help them create a successful financial future.

Busey Wealth Management and our team of experienced professionals can help you navigate the federal gift tax rules in order to bring your family’s financial dreams to life. To learn more about Busey Wealth Management’s comprehensive services, visit busey.com/wealth-management.

This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.

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