Are payments of health insurance premiums for a child, grandchild, or other party subject to federal gift? No, provided the payment is made correctly.

I.R.C. § 2503(e)(2) excludes from gift 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 who provides medical care (as defined in section 213(d)) with respect to such individual as payment for such medical care.

For this purpose, medical care is defined under Section 213(d) as amounts paid for:

  • for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,
  • for transportation primarily for and essential to medical care
  • for qualified long-term care services, or
  • for insurance covering medical care or for any qualified long-term care insurance contract.

Note, however, that to get the benefit of the Section 2503(e) exclusion with respect to insurance premiums, the payment must be made directly to the insurer. Likewise, the exclusion for other medical payments only applies if the payment is made directly to the health care provider, and the exclusion for tuition payments only applies if made directly to the institution. Gifts to the beneficiary that are later used for educational or medical purposes are NOT excluded.

Note, further, that the Section 2503(e) exclusion applies regardless to amount. It is not limited to, and is in addition to, the $14,000 (previously $10,000) per person annual exclusion of present interest gifts set forth in Section 2503(c).

As a reminder, Tennessee abolished the state gift tax in 2012.

Source: 26 U.S.C. § 2503

Posted by Joel D. Roettger, JD, LLM, EPLS