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 TUITION GIFTS – INCREASING YOUR ANNUAL GIFT EXEMPTION Silverman, Bernheim and Vogel While most people are aware of the annual exclusion from Gift Tax (currently $11,000 per donee per year), there is a lesser known exclusion, for educational expenses, which can be used to transfer wealth from one generation to the next, or even to skip generations, at no gift tax cost. A gift of tuition paid on behalf of a donee to a qualifying educational institution, regardless of the amount, is also excluded from Federal Gift Tax. As to what qualifies as a “qualifying” educational institution, the school must be one that maintains a regular faculty and curriculum and has a regularly enrolled body of pupils or students in attendance at the place where the school’s educational activities are regularly carried on. In addition, the school must qualify as a tax-exempt entity to which contributions may be deducted as a charitable deduction. Secondly, the payments must be for tuition costs and must be made directly to the institution; gifts in reimbursement of tuition payments will not meet the requirements for the exclusion. Thus, payments for books, room and board (whether or not in school-provided housing, i.e., dormitories or residence halls) will not meet the requirements for the exclusion. Nor can the exclusion be used to cover the non-tuition costs of a “semester abroad” or similar education-related expenses. The exclusion is unlimited in amount. In today’s environment of outrageous tuition costs, where, at some universities, tuition alone is in excess of $25,000 per year, this exclusion affords parents and grandparents the opportunity to pay these tuition costs for their children and grandchildren without the burden of gift taxes. The exclusion is available regardless of the relationship, if any, between the donor and the donee. Because, these tuition gifts are also exempt from the onerous Generation Skipping Transfer Tax, they may be particularly useful to grandparents who have exhausted their “regular” annual or lifetime gift tax exclusions, and who expect they are likely to exceed the exemption equivalent for estate taxes and/or their $1,000,000 lifetime GSST exclusion. Yet another tax savings opportunity is available for medical expenses paid directly to a medical service provider who has provided service to another, i.e., the donee. Such expenses include not only those items which typically fall within the term “medical expenses” but qualified long-term care services, medical insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care or for any qualified long-term care insurance contract and prescription drugs. Again, to qualify for the exclusion, the payments must be made directly to the service provider; reimbursement of payments made by the donee will not do. For more information contact Warren Vogel or Warren L. Soffian. Copyright 2002 by Silverman Bernheim & Vogel - All Rights Reserved. << Back to Article Index |
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