Tax implications of paying someone else's medical bills

Question

If I wanted to help pay a significant sum towards an extended family member's (in-laws) medical bills, would that be subject to any kind of gift tax or similar? Just for an example say I wanted to pay for $50,000 towards their medical bills. My thought process was that:

a. If I wrote my family member a check for $50,000 they would then owe tax on that (I think?), so they could only use $40,000 (or whatever the value works out to) towards their actual bills.

b. If I directly paid the hospital and the money never went "through" my family member then the money would not be subject to this tax. Therefore all $50,000 is applied towards their medical expenses.

Is option b the correct approach in this situation?

Answer 1

Almost.

In case (a) you would owe tax, not them. It is called "Gift tax" and is reported on form 709. It is related to the estate tax and you can use some of your estate tax exemption to avoid actually paying the gift tax. I explained it in more details here.

There are exemptions that you could use (up to 16K per donor/donee pair is exempt from reporting, so you and your spouse can give your in-laws up to $64K exempt, as long as you write 4 different checks. Alternatively it would still be exempt, but you'd need to report "gift splitting" on form 709).

For (b), if you're paying the medical bill directly with the provider, it is exempt from gift tax. I talked about this case here.