While financial gifts are subject to a federal gift tax, the IRS does make an exclusion in the case of financial gifts used for tuition payments. The exclusion, called the Gift Tax Education Exclusion for Tuition, means that money gifted to a friend or family member to pay for college tuition is not subject to the federal gift tax.
What are Annual Exclusion Gifts?
Annual exclusion gifts are gifts given to someone other than a spouse that does not qualify to be taxed. In 2019, the Internal Revenue Service increased the annual exclusion gift limit to $15,000 per person. That means you can gift up to $15,000 to as many different people as you want without paying tax on the amount. You do, however, not need to file an IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return if your payments to any single recipient do not exceed a total of $15,000.
Married couples can pool their annual exclusion gift amounts to give a recipient a total of $30,000 before attracting a gift tax liability. Married couples may still need to file an IRS Form 709, even if their annual exclusion gifts amount to less than $30,000, to report “split gifts.” An accountant can advise you whether any gifts of tuition you’ve made qualify as split gifts. This federal gift tax return is due on April 15 the year after the gift is made.
Paying for Tuition to Qualify for Educational Exclusion
Under the Internal Revenue Code, you can pay unlimited amounts for someone’s tuition and not be taxed. To make a tuition gift that qualifies for the federal gift tax educational exclusion, you should make the tuition payment directly to the student’s school – you should not give the money directly to the student. Tuition payments can be made to qualifying educational institutions within the United States or overseas. According to Section 170(b)(1)(A)(ii) of the Internal Revenue Code, qualifying schools maintain a regular faculty and curriculum. They also have a regular body of students attending the place where educational activities are conducted.
The payment you make to the school must only cover tuition. It may not be used for other educational expenses, such as on-campus accommodations or textbooks.
Whose Tuition Can You Pay to Qualify for Educational Exclusion?
You can qualify for the federal gift tax educational exclusion simply by paying for any student’s tuition. You may cover any student’s tuition, whether he or she is studying full-time or part-time. He or she can also attend a variety of educational institutions, from elementary schools to universities. You might pay for the tuition of your child, your grandchild, a sibling, a student you’re mentoring, or someone else whose education you care about. The choice is yours!
Gifting tuition is a great way to ease the financial burden of someone you love while reducing your annual tax burden. Exclusion gift limits may increase over time, so make sure you’re aware of your eligible claims each year. Don’t overlook opportunities to further a loved one’s education through the gift tax education exclusion.