What’s a Gift? Understanding the Annual Exclusion Amount

​My all-time favorite board game is the Game of Life. Growing up, every time we had a snow day, my younger sister, Jess, and I would break out the Game of Life. Nothing in the world was better than drinking hot chocolate and playing Life while watching the snow pile up outside the window. Even at the age of 12, I already had my Game of Life strategy mapped out. I knew I was taking the “college” route. I knew what career I wanted. I knew how many children I wanted. Jess and I even kept lists of our children’s names. We were (and quite honestly still are) obnoxious when we play this game. Naturally, I always want to pass my love of the game to anyone that wants to play it with me. Beware: I will make you name your children and I will want certain career and house cards, so play at your own risk.
 
Last summer, my sister was down to visit so I dusted off my Game of Life board game so I could play it with my six year old nephew, Austin. He didn’t quite appreciate my excitement over the game, but we had fun playing. Last weekend, I had the opportunity to visit Austin in New York. When I got there he was so excited to tell me that he had gotten the Game of Life to play with me while I was visiting. Interestingly, the version he had was not a board game. It was a card game with the same general premise. I loved it! We probably played that game at least four times over my three day stay. I think I may have found a fellow Game of Life addict. Austin even agreed to name his children while we were playing, and he didn’t get too mad when I insisted that I had to earn a degree during our game.
 
Weirdly, what struck me the most while I was playing the Game of Life over the weekend were all the tax issues that cropped up while playing the card game versus the board game. For example, when Jess and I played the board game version of the Game of Life, you had to borrow money in order to take the college route. Every time I have played the game, I have to add loans to my stack of money since I always choose the college route. In the card version of the game, you don’t have to take out a loan. Instead, you attend college, when you draw a “degree” card. Once you receive the “degree” card, you have ten points. At the end of the game, you tally up all of the points indicated on each card, and the person with the most points win. You can even draw multiple “degree” cards. My favorite game was when I drew three “degree” cards, but still ended up being a popstar because that was the career card that I drew. Why is it when I played the board game I had to have loans to take the college route, but for the card game I didn’t have to take out a loan? My real life would have been so much easier if I didn’t have to take out loans to attend college.
 
The only solution I could come up with was that my Game of Life parents must have made transfer directly to the educational institution on my behalf. How generous! Apparently, the makers of the card Game of Life must be familiar with Internal Revenue Code Section 2503(e). This section provides that any transfer made for tuition directly to the education institution is a qualified transfer and not treated as a transfer of property for gift tax purposes.
 
In real life, if my parents wanted to transfer money to me, they could transfer the annual exclusion amount, which is $15,000 per donor/per donee for 2020, without having to file a federal gift tax return (Form 709). If they gifted me anything over the combined $30,000 then they would have to file a gift tax return (Form 709), but there would be no federal gift tax unless they exceeded their lifetime gifting exemption of $11,580,000 in 2020.
 
What Section 2503(e) provides is that a transfer made to an educational organization for tuition or to a medical institution for medical care is not treated as a transfer of property by gift. That means that my Game of Life parents could pay my tuition directly to the educational organization and then still gift me $28,000/year for gift tax purposes without having to file a gift tax return (Form 709) or pay any gift tax. In the game where I drew three “degree” cards, they paid the tuition directly to the educational organizations during my three college stints. Importantly, the transfer to the educational organization has to be for tuition. It cannot be for room or boarding expenses.
 
I usually don’t play the Game of Life with clients during their appointments, so we don’t get to discuss the “degree” cards and the non-transfers made when my fake tuition is paid, but frequently, when I meet with clients they reference the $10,000 they can gift annually. To me, that is like discussing the “degree” card. That $10,000 they are referring to is the annual exclusion amount for federal gift tax purposes. The annual exclusion amount is the amount you can transfer during a year that is not considered a taxable gift for federal gift tax purposes. The text of Section 2503(b)(2)(A) does indicate $10,000 may be transferred annually without tax consequence, but that amount is adjusted periodically for cost of living. The annual exclusion amount that was originally $10,000 is now $15,000 in 2020 because of those adjustments.
 
To add more confusion to the mix, the amount you can gift for federal purposes is different than the amount you can gift for Medical Assistance purposes. It is important to note, that neither the board game version of the Game of Life, nor the card game version addressed Medical Assistance. I guess no one in the Game of Life needs Medical Assistance. For Medical Assistance purposes, an individual can only gift $500/month. A transfer of more than $500/month results in a transfer which means that an individual may trigger a penalty period in which they have to privately pay for care and not eligible to receive Medical Assistance.
 
What is important to remember in all of this, is that you can gift the annual exclusion amount of $15,000/year, but $14,500 of that gift is considered a transfer for Medical Assistance purposes and that may impact any benefits you may be receiving. Just because the Game of Life doesn’t address it, doesn’t mean it doesn’t happen in real life.
 
Who would have thought that a card I drew while paying the card game version of the Game of Life would prompt such an in-depth explanation regarding the difference between a non-transfer of property, annual exclusion amount and gifting, and a gift for Medical Assistance. Thankfully, I did not share this information with Austin while we were playing. I was afraid that he wouldn’t want to play with me in the future. Perhaps, as Austin gets older I will integrate these fun factual nuggets as part of our game. I will feel like I have earned my ten points when I draw a “degree” card.