Beat the Back to School Tuition Blues

FlickR Credit: Tax Credits

CC: https://creativecommons.org/licenses/by/2.0/

by Rebecca S. Luster Radford

As the beginning of the school year nears, many families are discussing the payment of this year’s tuition. Many grandparents or other relatives assist their family members in the payment of tuition. If done properly, payment of a student’s tuition is an excellent method of passing wealth on to younger generations without eating into the unified credit for Gift Tax and Generation-Skipping Transfer (GST) Tax or imposing such taxes.

Section 2503(e) of the Internal Revenue Code (IRC) details that “qualified transfers” are excluded from the definition of a gift and, thus, are not treated as a transfer of property for purposes of the Gift Tax or GST Tax. In order to satisfy the requirements for a qualified transfer, (1) the payment must be only for tuition (i.e. not books, room and board, etc.) and (2) the payment must be made directly to a qualified educational organization per IRC Section 170(b)(1)(A)(ii), which traditional schools satisfy.

By paying tuition directly to the school, the payor may still give up to his or her annual exclusion, which is currently $14,000 per person, directly to the student without implicating Gift Tax, GST Tax, or their unified credit, thus enabling him or her to pass on additional wealth. If the gift was made to the student and then subsequently used by the student for tuition, the gift would be included in the calculation of the $14,000 annual exclusion from Gift Tax; this ultimately decreases or swallows entirely the additional amount to which the donor may give to the student that year. Education (or tuition) truly is the gift (or “gift” exclusion) that keeps on giving.