With education costs soaring to all or any time highs, making tuition payments for grandchildren and others can save a lot of money in gift and estate taxes later on – even if the donor is not alive once the tuition money is clearly used.
Through some background, the tax laws exempt tuition payments by grandparents or others from any gift taxes, provided certain requirements are met. tuition for maths First, the sole educational costs that are gift-tax free are tuition costs. The price of room and board, books, and other educational expenses aren’t exempt.
Second, the tuition costs must certanly be paid directly to an educational organization that “normally maintains a regular faculty and curriculum and normally includes a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” Notice that there is no requirement that the tuition costs be paid to a college or university. In fact, tuition payments for nursery school, private elementary school, and private senior high school can also qualify. It’s possible, too, that tuition payments for part-time courses, such as for instance dance, theater, music, cullinary arts, and the like will also qualify for the gift tax exemption.
So, how is this such a good deal? In the initial place, these tuition payments aren’t treated as taxable gifts, so you don’t need to be worried about having them come under the annual gift tax exclusion. In fact, you can make tuition payments for your grandchildren or others and still give all of them the annual exclusion amount ($12,000 for 2006) as a birthday gift or whatever.
Second, if your estate is big enough to be concerned about federal estate taxes (currently in excess of $2 million, $4 million for a couple), then the total amount of the tuition payments will soon be excluded from your own estate upon your death. Quite simply, your tuition payments won’t be at the mercy of something special tax once the payments are made, nor will they be at the mercy of an estate tax upon your death. In addition, they will not be at the mercy of any generation-skipping taxes (GST) upon your death
That’s pretty good deal alone, but here’s an added bonus. On July 9, 1999, the Internal Revenue Service issued Technical Advice Memorandum 199941013 stating that prepayment of tuition costs was also exempt from gift taxes under IRC Section 2503(3)(2). In that one case, some grandparents had made payments to a personal school to cover tuitiion costs because of their two grandchildren from pre-school through grade 12. There is an agreement between the school and the grandparents indicating that the tuition payments would not be refundable even if the grandchildren failed to go to the school each of those years. The sum total payments made by the grandparents amounted to over $181,000 over a two-year period.
Recently, the Internal Revenue Service issued a personal letter ruling that supports the Technical Advice Memorandum cited above. For the reason that case, the IRS told a taxpayer that prepayments of many years of tuition costs for his grandchildren would not be described as a gift.
While Technical Advice Memorandums and private letter rulings only affect the taxpayer’s who request them, they are a good indication of the IRS’ position on specific tax matters. Here, it appears fairly clear that prepayment of multiple years of tuition costs won’t be treated as a taxable gift by the IRS.
Now, let’s sort of put all of this into perspective. In the TAM discussed above, the grandparents pre-paid roughly $181,000 of tuition costs over a two-year period. The payments weren’t treated as taxable gifts and, since the money was removed from their estate, it was not at the mercy of estate taxes upon their death. If the grandparents kept the money until they died and then gave it for their grandchildren under their will, it might have been through probate first, then could have been at the mercy of a federal estate tax and then, possibly, a generation-skipping tax – all before maybe it’s employed by the grandchildren.
If the grandparents had a reasonably large estate, say bigger than $4 million, then the estate taxes paid on that $181,000 will be roughly $83,260 (based upon a limited tax rate of 46%). For the reason that case, prepaying the tuition costs resulted in a estate tax savings of roughly $83,260. Plus, the grandparents didn’t have to use up their annual gift-tax exclusion to have the estate tax savings.