With college tuition coming due, families should consider tax efficient ways to pay for these expenses. Grandparents who wish to help their children with tuition costs can take advantage of some special gift tax breaks.
Grandparents have the usual annual present interest gift tax exclusion (now $15,000) and a lifetime exclusion (now $10,580,000). When a spouse joins in the gift (the called “spousal joinder”), these amounts double.
But these are not the only tax breaks available to a grandparent who wants to help the family. In addition, grandparents have an unlimited gift tax exemption for amounts paid for tuition. By using this special educational exclusion, such payments do not count against the annual gift tax or lifetime exclusions.
Here are the basic rules to qualifying these gifts for such unlimited educational exemption:
This exclusion from the gift tax for gifts of tuition is unlimited in amount. However, the scope of the exclusion applies to tuition only.
There is no exclusion for amounts paid for the following:
See Treasury Regulations 25.2503-6(b)(2) for more details.
The gift tax is not imposed on amounts paid as tuition for a student to a qualifying domestic or foreign educational organization for the education or training of such person. See Code Section 2503(e)(1) and (2)(A).
Tuition payments for the student qualify where enrollment is part-time or full-time.
A qualifying educational organization is one which:
See Code Section 170(b)(1)(A)(ii) and Treasury Regulation 25.2503-6(b)(2).
The tuition payment must be made directly to the educational organization to qualify for this exclusion.
Neither a payment to the student for delivery to the organization nor a payment to a trust for the student’s benefit for delivery to the educational organization will qualify for this exclusion. See Treasury Regulation 25.2503-6(b)(2) and (c) (Example 1).
Advance payments for future school years, made directly to a private school and used exclusively for the tuition expenses of designated students were excludable gifts where the payments were nonrefundable and the school would keep the funds if the children ceased to attend the school. TAM 199941013, PLR 200602002.
Prepayment of many years of private school tuition for a young child occurred in both cases. Since anything can happen with young children care should be exercised before making such a large prepayment.
This educational exclusion is permitted without regard to the relationship between the donor (person making the gift) and the donee (recipient of the gift).
Recipients (donees) need not be a dependent of the donor or even related to the donor.
This exclusion does not use up the following other gift tax exclusions available to the donor:
1. Annual present interest gift tax exclusion of $15,000, and
2. Lifetime gift tax exclusion of $10,580,000
For more on gift giving readers can check out Gift Giving: A Way To Save Estate, Gift and Income Taxes, Gift Tax Guide and Gifting Shares of Stock In A Bad Economy
No gift tax return (Form 709) needs filing where the only gift during the tax year qualifies for the tuition gift tax exemption.
Contributions to a Qualified State Tuition Program (a Section 529 plan) do not qualify for this educational expense exemption. See Code Section 529(c)(2)(A)(ii).
But a contribution to a Section 529 plan qualifies as a completed gift of a present interest that is eligible for the gift tax annual exclusion of $15,000. If the spouse joins in the gift the exclusion would be $30,000. For more on this topic please read Section 529 Plans: Gift Tax Rules.
This exclusion offers a very powerful tool for overall estate and tax planning for families. Donors should consider it as part of a family’s overall estate and gift tax strategies. Although not discussed, state inheritance taxes should be considered as part of this tax saving strategy.
Sit down with your experienced and skilled estate planning attorney or reach out to us before doing anything to make sure this planning tool is right for your specific situation and your overall estate plan.
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