Gifting and The Tuition Expense Exclusion

Clients are often aware that each year the IRS allows individuals to gift $14,000.00 to any individual without incurring any adverse gift tax consequences. This is called the annual exclusion. It used to be $10,000 per year and has been increased over the years. There is some discussion that it may be $15,000 next year. However, individuals are sometimes not aware that donors are permitted to pay educational tuition for any one of their choosing directly to an educational organization, and this payment is not considered a gift. Thus, an individual that pays college tuition directly to his or her relative’s college or university can also make a $14,000 gift to that same individual as well, without incurring any adverse gift tax consequences.

There are certain factors that need to be considered in order to use this educational exclusion. Those factors are as follows:

• The tuition must be paid directly to an educational organization. Pursuant to the IRS Regulations, an educational organization is one that maintains a regular faculty and curriculum. The organization must also have a regular enrollment of students who attend the educational activities at the location of the educational organization. Educational organizations include not only colleges and universities, but also primary, secondary, prep schools, and high schools.
• The educational exclusion is limited to tuition. Payments for tuition must be made directly to the educational organization in order to qualify as a gift tax exclusion. Thus, this exclusion generally does not apply to books, supplies, or room and board. However, if the educational organization is a boarding school, which lumps all of their expenses together and only charges a tuition fee for all, then there is uncertainty as to whether or not an individual can claim the full amount as an educational exclusion payment. However, the general practice is to claim the full fee charged as an educational tuition expense exclusion.
• Therefore, if you would like to pay someone’s tuition expense and qualify the payment for the educational exclusion, and maybe even provide a $14,000.00 gift to them annually, you are able to do so. You must make sure you understand and adhere to the requirements of this planning technique. Please make sure that you consult your attorney or tax advisor before undertaking such a gifting plan.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.