Can you make a cash gift to your child and still pay his or her college tuition without any gift tax problems? That was the question posed to me earlier this week as I helped a client whose child was attending college. The client knew that he could gift his child up to $13,000 per year (that is the 2012 limit, which is adjusted for inflation), but that anything more might cause him to have to report the gift to the IRS and even pay a gift tax. My client had been helping his child through college by paying his tuition, and he would like to make additional cash gifts to his child, but only if he did not have to report the additional gifts or pay taxes on them.
The Internal Revenue Code allows a person to pay a child’s college tuition and to make additional cash gifts to the child in the same year without the imposition of the gift tax, so long as the giver follows certain instructions. The IRS excludes from the giver’s gift tax calculation the tuition amount paid on behalf of the recipient, as long as the tuition is paid directly to the college, university or other educational institution. This means the giver must actually write the check or forward payment for the tuition directly to the educational institution. If the funds are given to the recipient who then pays the college or university, then the amount given to the recipient is considered a gift to the recipient and is included in the giver’s gift tax calculation.
In order to qualify, the tuition payments must be sent to an educational institution, which is an institution that maintains a faculty, curriculum and students, but is not limited just to post-secondary education. (You might be surprised at what some people would consider to be education, but that is a story for a different day.) The tuition exclusion does not include a relationship requirement between the giver and the recipient, so a grandparent may do this for a grandchild, a parent for a child, a friend for a friend, etc. Additionally, there is no age restriction, so this may be done to help an adult go back to school to gain additional education or to renew his or her job skills. This could be especially important for someone who may have been laid off and needs to update his or her skills in order to re-enter the workforce.
Contributed by MH Phoenix attorney and partner Katherine A. O’Connell
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