What’s gift tax exclusion for tuition?
While financial gifts are usually subject to a federal gift tax, the Internal Revenue Service (IRS) does make an exception for financial gifts that are for tuition payments. The exclusion means that money given to a friend or family member to pay for college tuition is generally not subject to the federal gift tax. This can be significant for the person paying the tuition and the person on the receiving end.
In this article, we'll cover what this gift tax exclusion is, along with its limits.
What's the annual federal gift tax exclusion?
The United States' annual federal gift tax exclusion as of 2023 allows you to gift up to $17,000 per person per year without being subject to the gift tax, up to the $12.92 million lifetime exemption. Gifts totaling at most $17,000 aren't subject to the gift tax. Because of that, when you gift a single recipient $17,000 or less, you don't need to file an IRS Form 709 — the United States Gift (and Generation-Skipping Transfer) Tax Return.
Married couples can pool their annual exclusion gift amounts to give a recipient a total of $34,000 or less. Of note, married couples may still need to file an IRS Form 709, even if their annual exclusion gifts amount to less than $34,000, to report "split gifts."
Now, the tuition gift tax exclusion takes this one step further — grandparents or others making tuition gifts paid directly to a school or qualifying education program are exempt from gift taxes and the Generation-Skipping Transfer Tax. Direct tuition payments made on someone's behalf aren't counted toward the $17,000 annual gift tax exclusion and won't count towards someone's $12.92 million lifetime gift tax exemption, either. It's important to note that the tuition gift tax exclusion only applies to tuition.
How to pay tuition to qualify for the gift tax exclusion for tuition
Under the IRS tax code, individuals may pay an unlimited amount for someone's tuition and not be taxed. To make a tuition gift that qualifies for the federal gift tax educational exclusion, you can't give the money directly to a student, you must make the tuition payment directly to the student's school.
Tuition payments must be made to qualifying educational institutions. Qualifying schools must maintain a regular faculty and curriculum and have a regular body of students attending the institution.
The payment made to the school must only cover tuition. It may not be used for other educational expenses, like room and board or textbooks.
Whose tuition can you pay to qualify for the gift tax exclusion for tuition?
Simply by paying for a student's tuition at a qualifying institution – whether that student is studying full-time or part-time – you can qualify for the federal gift tax educational exclusion. There are no limitations as far as who the student is — it can be your child, your grandchild, a sibling, a student you're mentoring, or someone else whose education you care about. The gift tax exclusion can also be used when paying tuition to a variety of educational institutions, from elementary schools to universities.
Repercussions for using the gift tax exclusion for tuition
The gift tax exclusion for tuition will have implications for those paying the tuition and for the students receiving it. For those paying the tuition, this action will move that amount from the payee's taxable estate.
For students receiving the tuition, it can potentially reduce their financial aid eligibility. These are just two things to weigh when it comes to the gift tax exclusion for tuition.
If you're considering gifting tuition, it might be worth discussing this decision with your loved one and an accountant to make sure you know all of its implications so you can make the most informed decision possible.