paying for child's college tuition - does it count towards the limit for gift tax?

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gabriel1970
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paying for child's college tuition - does it count towards the limit for gift tax?

Post by gabriel1970 » Mon Feb 26, 2018 9:26 pm

I am paying my daughter's college tuition. Does the payment count as a gift towards the $15K limit before gift tax kicks in? Thank you very much.



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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by gabriel1970 » Mon Feb 26, 2018 9:43 pm

Thank you for the replies. Understood.

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Epsilon Delta
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Epsilon Delta » Mon Feb 26, 2018 10:50 pm

While paying the institution directly clearly qualifies for the exemption, none of the examples I've seen mention parents.

Does anybody have a cite where a payment to a dependent son or daughter that is then used for tuition (i.e. not directly to the school) is considered a gift (or not a gift).

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FiveK
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by FiveK » Mon Feb 26, 2018 11:14 pm

Epsilon Delta wrote:
Mon Feb 26, 2018 10:50 pm
While paying the institution directly clearly qualifies for the exemption, none of the examples I've seen mention parents.

Does anybody have a cite where a payment to a dependent son or daughter that is then used for tuition (i.e. not directly to the school) is considered a gift (or not a gift).
There is this in 2017 Publication 970 - p970.pdf:
Expenses paid by dependent.
If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them.
Other than the exceptions above, there is Frequently Asked Questions on Gift Taxes | Internal Revenue Service:
What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.
  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
...

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Epsilon Delta
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Epsilon Delta » Tue Feb 27, 2018 12:02 am

FiveK wrote:
Mon Feb 26, 2018 11:14 pm
There is this in 2017 Publication 970 - p970.pdf:
Expenses paid by dependent.
If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them.
Thank you, although I am not sure that this is a rule that applies to Gift Tax as well as the American Opportunity Credit and Lifetime Learning Credits. The dependent rules for these credits is explicit in 26 US Code 25A(g)(3) and that paragraph only applies to various education credits.

RetiredCSProf
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by RetiredCSProf » Tue Feb 27, 2018 1:28 am

My understanding is that the Gift Tax does not apply to dependents. So, answer depends partly on your child's age and whether she is a full-time student

libralibra
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by libralibra » Tue Feb 27, 2018 2:12 am

RetiredCSProf wrote:
Tue Feb 27, 2018 1:28 am
My understanding is that the Gift Tax does not apply to dependents. So, answer depends partly on your child's age and whether she is a full-time student
I think it does apply, e.g. when you open a UTMA or 529, you have to watch the limits each year (they even have a specific 5 year lump sum exception for 529 deposits).

Not sure what else might actually break the 15k threshold. Maybe if you bought your kid a new car for their sweet-sixteenth?

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by HueyLD » Tue Feb 27, 2018 7:59 am

FiveK wrote:
Mon Feb 26, 2018 11:14 pm
Epsilon Delta wrote:
Mon Feb 26, 2018 10:50 pm
While paying the institution directly clearly qualifies for the exemption, none of the examples I've seen mention parents.

Does anybody have a cite where a payment to a dependent son or daughter that is then used for tuition (i.e. not directly to the school) is considered a gift (or not a gift).
There is this in 2017 Publication 970 - p970.pdf:
Expenses paid by dependent.
If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them.
Other than the exceptions above, there is Frequently Asked Questions on Gift Taxes | Internal Revenue Service:
What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.
  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
...
FiveK,

The sentence you quoted from an IRS website is unfortunately incomplete. It must have been deleted accidentally by the writer of that blog.

The relevant law and regulation is very clear on the conditions undear which certain gifts are exempt from gift tax.

The most well known ones are:

(1). Payments made DIRECTLY to a qualified educational organization for TUITION.

Note that both "directly" and "tuition" are the key words. In other words, you cannot make a direct payment of $50k ($20k for tuition and $30k for room and board) and claim $50k exemption. You can only exempt $20k.

(2). Payments made DIRECTLY to a provider for MEDICAL expenses.

Note that you cannot give someone money and let him make payments to the provider.

But again with the new and improved gift/estate tax exempt of $10MM, the likelihood of being hit with gift tax is very low and unlikely for the vast vast majority of Americans.

See 26 U.S. Code § 2503 - Taxable gifts

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Wagnerjb » Tue Feb 27, 2018 10:56 am

HueyLD wrote:
Tue Feb 27, 2018 7:59 am

The most well known ones are:

(1). Payments made DIRECTLY to a qualified educational organization for TUITION.

Note that both "directly" and "tuition" are the key words. In other words, you cannot make a direct payment of $50k ($20k for tuition and $30k for room and board) and claim $50k exemption. You can only exempt $20k.
Huey: I understand the law as explained in this thread and am not debating it. However, I am struggling to believe that normal upper middle class parents of college kids should be filing a form 709 every year. With a child at an expensive college such as in your example of $30k in room and board, it would be easy for a married couple to exceed the $28k gift tax exemption in any one year. In a one parent household, it would be easy to exceed the annual $14k limit with a typical in-state college too.

As a practical reality, do you see such situations where real people are actually filing form 709 due to college expenses? I have an awful lot of friends in this situation (upper middle class, kids in private and/or state colleges) and I have never ever heard one of them mention form 709.

Am I missing something here?
Andy

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Gill » Tue Feb 27, 2018 11:02 am

RetiredCSProf wrote:
Tue Feb 27, 2018 1:28 am
My understanding is that the Gift Tax does not apply to dependents. So, answer depends partly on your child's age and whether she is a full-time student
I'm not sure where you acquired that understanding, but there is no such exclusion for dependents. If that was the case it would be a huge loophole for avoiding the estate tax.
Gill

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by miamivice » Tue Feb 27, 2018 11:14 am

Wagnerjb wrote:
Tue Feb 27, 2018 10:56 am
HueyLD wrote:
Tue Feb 27, 2018 7:59 am

The most well known ones are:

(1). Payments made DIRECTLY to a qualified educational organization for TUITION.

Note that both "directly" and "tuition" are the key words. In other words, you cannot make a direct payment of $50k ($20k for tuition and $30k for room and board) and claim $50k exemption. You can only exempt $20k.
Huey: I understand the law as explained in this thread and am not debating it. However, I am struggling to believe that normal upper middle class parents of college kids should be filing a form 709 every year. With a child at an expensive college such as in your example of $30k in room and board, it would be easy for a married couple to exceed the $28k gift tax exemption in any one year. In a one parent household, it would be easy to exceed the annual $14k limit with a typical in-state college too.

As a practical reality, do you see such situations where real people are actually filing form 709 due to college expenses? I have an awful lot of friends in this situation (upper middle class, kids in private and/or state colleges) and I have never ever heard one of them mention form 709.

Am I missing something here?
How many colleges charge more than $28k per year in room and board? I just Googled Harvard and saw that it was $10k. Harvard is not a cheap school, so I'd be surprised (without knowing) if a lot of schools charge more than $28k per year.

In any event, filing the gift tax form doesn't mean one has to pay gift tax. It just means that they've used up some of their lifetime estate exemption. At the moment the total amount of gifts to others have to exceed $22 million for a married couple before gift tax comes into play, so it doesn't have much real effect.

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Epsilon Delta
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Epsilon Delta » Tue Feb 27, 2018 11:36 am

Gill wrote:
Tue Feb 27, 2018 11:02 am
RetiredCSProf wrote:
Tue Feb 27, 2018 1:28 am
My understanding is that the Gift Tax does not apply to dependents. So, answer depends partly on your child's age and whether she is a full-time student
I'm not sure where you acquired that understanding, but there is no such exclusion for dependents. If that was the case it would be a huge loophole for avoiding the estate tax.
Gill
I can't find any such exemption, but I also can't find anywhere the gift tax has been applied in such circumstances. I have a hard time believing it's never happened or that it's but never been noticed by the IRS.* If there is a precedent I'd expect the financial press to be all over it. Which is why I asked for a cite one way or the other.

* Unless the IRS has a deliberate blind eye.

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teen persuasion
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by teen persuasion » Tue Feb 27, 2018 11:59 am

miamivice wrote:
Tue Feb 27, 2018 11:14 am
Wagnerjb wrote:
Tue Feb 27, 2018 10:56 am
HueyLD wrote:
Tue Feb 27, 2018 7:59 am

The most well known ones are:

(1). Payments made DIRECTLY to a qualified educational organization for TUITION.

Note that both "directly" and "tuition" are the key words. In other words, you cannot make a direct payment of $50k ($20k for tuition and $30k for room and board) and claim $50k exemption. You can only exempt $20k.
Huey: I understand the law as explained in this thread and am not debating it. However, I am struggling to believe that normal upper middle class parents of college kids should be filing a form 709 every year. With a child at an expensive college such as in your example of $30k in room and board, it would be easy for a married couple to exceed the $28k gift tax exemption in any one year. In a one parent household, it would be easy to exceed the annual $14k limit with a typical in-state college too.

As a practical reality, do you see such situations where real people are actually filing form 709 due to college expenses? I have an awful lot of friends in this situation (upper middle class, kids in private and/or state colleges) and I have never ever heard one of them mention form 709.

Am I missing something here?
How many colleges charge more than $28k per year in room and board? I just Googled Harvard and saw that it was $10k. Harvard is not a cheap school, so I'd be surprised (without knowing) if a lot of schools charge more than $28k per year.

In any event, filing the gift tax form doesn't mean one has to pay gift tax. It just means that they've used up some of their lifetime estate exemption. At the moment the total amount of gifts to others have to exceed $22 million for a married couple before gift tax comes into play, so it doesn't have much real effect.
Given that room and board was already $10k/yr when my oldest started college in 2008, and it's running over $12k/yr at kid #4's state school now, I had to double check that Harvard number. It's $10,300 just for room. Board's another $6360, and you can tack on another ~$4k for other expenses like books, travel, personal items.

So not $28k, but more than $20k.

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FiveK
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by FiveK » Tue Feb 27, 2018 12:01 pm

HueyLD wrote:
Tue Feb 27, 2018 7:59 am
FiveK wrote:
Mon Feb 26, 2018 11:14 pm
Epsilon Delta wrote:
Mon Feb 26, 2018 10:50 pm
Does anybody have a cite where a payment to a dependent son or daughter that is then used for tuition (i.e. not directly to the school) is considered a gift (or not a gift).
https://www.irs.gov/pub/irs-pdf/p970.pdf
https://www.irs.gov/businesses/small-bu ... gift-taxes
The sentence you quoted from an IRS website is unfortunately incomplete. It must have been deleted accidentally by the writer of that blog.
The relevant law and regulation is very clear on the conditions under which certain gifts are exempt from gift tax.
The most well known ones are:
(1). Payments made DIRECTLY to a qualified educational organization for TUITION.
Note that both "directly" and "tuition" are the key words. In other words, you cannot make a direct payment of $50k ($20k for tuition and $30k for room and board) and claim $50k exemption. You can only exempt $20k.
...
Note that you cannot give someone money and let him make payments to the provider.
Not sure where a "blog" entered the discussion. Direct links to the IRS websites shown above. But back to the main issue raised by Epsilon Delta....

Are you aware of any court case in which
- parents put >$14K/person/yr (or whatever the exclusion limit was) into a child's account, did not file form 709, and
- child took that money and used it to pay tuition and other educational expenses, and
- the IRS imposed any fee/tax whatsoever due solely to the above?

I understand what a literal reading of 26 U.S. Code § 2503 - Taxable gifts says. But it sure seems a situation in which the step transaction doctrine would be used in the parents' favor.

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Wagnerjb » Tue Feb 27, 2018 12:01 pm

miamivice wrote:
Tue Feb 27, 2018 11:14 am

How many colleges charge more than $28k per year in room and board? I just Googled Harvard and saw that it was $10k. Harvard is not a cheap school, so I'd be surprised (without knowing) if a lot of schools charge more than $28k per year.
Colleges don't charge room and board, except maybe for a Freshman living in a dorm with a meal plan. But an upper class student in an apartment in a very expensive city could easily exceed that amount. Rent could very easily be over $1000 per month. Add food, other expenses, car insurance, gas, etc....and it wouldn't be too hard to exceed $28k. (I am sure lots of kids get by with a whole lot less, but I am not debating that right now). Upper middle class families can afford to spend that amount and I am sure there are plenty who actually do.
In any event, filing the gift tax form doesn't mean one has to pay gift tax. It just means that they've used up some of their lifetime estate exemption. At the moment the total amount of gifts to others have to exceed $22 million for a married couple before gift tax comes into play, so it doesn't have much real effect.
I understand that filing the form doesn't require any payment of gift tax. My question is whether people actually file the form or not.
Andy

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HueyLD
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by HueyLD » Tue Feb 27, 2018 12:11 pm

Wagnerjb wrote:
Tue Feb 27, 2018 10:56 am
HueyLD wrote:
Tue Feb 27, 2018 7:59 am

The most well known ones are:

(1). Payments made DIRECTLY to a qualified educational organization for TUITION.

Note that both "directly" and "tuition" are the key words. In other words, you cannot make a direct payment of $50k ($20k for tuition and $30k for room and board) and claim $50k exemption. You can only exempt $20k.
Huey: I understand the law as explained in this thread and am not debating it. However, I am struggling to believe that normal upper middle class parents of college kids should be filing a form 709 every year. With a child at an expensive college such as in your example of $30k in room and board, it would be easy for a married couple to exceed the $28k gift tax exemption in any one year. In a one parent household, it would be easy to exceed the annual $14k limit with a typical in-state college too.

As a practical reality, do you see such situations where real people are actually filing form 709 due to college expenses? I have an awful lot of friends in this situation (upper middle class, kids in private and/or state colleges) and I have never ever heard one of them mention form 709.

Am I missing something here?
No, you didn’t miss anything, Andy.

As a practical manner, payments for a dependent’s college related expenses count toward support for dependents. I have never seen parents filing gift tax returns for such items.

The rules in 26 U.S. Code § 2503 are really meant for those who pay for a “nondependent’s” education expenses. For example, a grandparent with resources may want to pay for an expensive private college education for a grandchild. And the standard advice is to make sure that the grandparent pays the college directly. Keep in mind that such rules existed before all the tax advantages vehicles were available (529’s, etc.)

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Spirit Rider » Tue Feb 27, 2018 12:40 pm

Epsilon Delta wrote:
Tue Feb 27, 2018 11:36 am
Gill wrote:
Tue Feb 27, 2018 11:02 am
RetiredCSProf wrote:
Tue Feb 27, 2018 1:28 am
My understanding is that the Gift Tax does not apply to dependents. So, answer depends partly on your child's age and whether she is a full-time student
I'm not sure where you acquired that understanding, but there is no such exclusion for dependents. If that was the case it would be a huge loophole for avoiding the estate tax.
Gill
I can't find any such exemption, but I also can't find anywhere the gift tax has been applied in such circumstances. I have a hard time believing it's never happened or that it's but never been noticed by the IRS.* If there is a precedent I'd expect the financial press to be all over it. Which is why I asked for a cite one way or the other.

* Unless the IRS has a deliberate blind eye.
The reason you can't find an exemption in this case is because there is none. Any gift of any property (including money) to or for any individual other than a spouse; except for direct payments of tuition or medical expenses is a gift subject to gift tax rules.

A clear unequivocal example is a gift to a UTMA account. Everyone knows that this is a gift subject to gift tax rules. You buy your 18 year old child a car, this is also a gift subject to gift tax rules. Your child doesn't go to college and you pay their rent, this is clearly a gift subject to gift tax rules. There is absolutely no difference with you paying a college student's living expenses. The only difference with a 529 or Coverdell account is that it is the contributions that are subject to gift tax rules and not the distributions.

However, in-kind family support expenses (food, shelter, clothing, etc...) of dependents while in residence are not considered gifts of property. Even when the college student is home on break, you do not have to consider these expenses as a gift subject to gift tax rules.

You are right. There is very little enforcement of gift tax reporting rules for most people, but we are a nation of laws. Especially, in the case of taxes it is a voluntary compliance system. We are talking about filing a Form 709 with the vast majority (except for a few thousand) never being subject to the federal unified estate/gift tax.

c1over8
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by c1over8 » Tue Feb 27, 2018 12:45 pm

The article beginning on page 2 provides insight on this issue:

http://www2.csudh.edu/rmalamud/Elder050111.pdf

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Wagnerjb » Tue Feb 27, 2018 12:50 pm

HueyLD wrote:
Tue Feb 27, 2018 12:11 pm
No, you didn’t miss anything, Andy.

As a practical manner, payments for a dependent’s college related expenses count toward support for dependents. I have never seen parents filing gift tax returns for such items.

The rules in 26 U.S. Code § 2503 are really meant for those who pay for a “nondependent’s” education expenses. For example, a grandparent with resources may want to pay for an expensive private college education for a grandchild. And the standard advice is to make sure that the grandparent pays the college directly. Keep in mind that such rules existed before all the tax advantages vehicles were available (529’s, etc.)
Thanks Huey. That makes sense.

Best wishes.
Andy

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Epsilon Delta
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Epsilon Delta » Tue Feb 27, 2018 1:19 pm

Spirit Rider wrote:
Tue Feb 27, 2018 12:40 pm
You are right. There is very little enforcement of gift tax reporting rules for most people, but we are a nation of laws.
A "nation of laws" is hollow without uniform and impartial enforcement, and reasonable mechanism to inform people about the laws that affect common everyday events. In this case all the IRS would have to do is change "grandparent" to "parent" in one of the examples in Pub 590.

Enough people are confused about this that not clarifying it is the very opposite of the rule of law. The law should not lay traps.

RetiredCSProf
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by RetiredCSProf » Tue Feb 27, 2018 1:34 pm

I see that this question has come up previously, but I am not seeing a clear, agreed-on answer in the responses
Gift tax and gifts to children

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by miamivice » Tue Feb 27, 2018 1:52 pm

I'm unaware of any exception in gift tax allowing parents to give money to their college age children exempt from gift tax reporting requirements.

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by miamivice » Tue Feb 27, 2018 1:57 pm

Wagnerjb wrote:
Tue Feb 27, 2018 12:01 pm
Colleges don't charge room and board, except maybe for a Freshman living in a dorm with a meal plan. But an upper class student in an apartment in a very expensive city could easily exceed that amount. Rent could very easily be over $1000 per month. Add food, other expenses, car insurance, gas, etc....and it wouldn't be too hard to exceed $28k. (I am sure lots of kids get by with a whole lot less, but I am not debating that right now). Upper middle class families can afford to spend that amount and I am sure there are plenty who actually do.
My undergraduate college charged room and board, all five years were there. I lived on campus as did many others. Some lived in university owned family housing, others on campus in residence halls.

Regardless though, 28k per year for housing is way, way, way above a typical students housing cost for 1 year of college. I would recommend a married couple who gives their kid $30,000 in one year to reimburse for "room and board" to file the gift tax.

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by praxis » Tue Feb 27, 2018 3:07 pm

Gill wrote:
Mon Feb 26, 2018 9:36 pm
Yes it does, unless it’s paid directly to the institution.
Gill
We have helped our son with grad school financially. He graduates this April with a Dr. in PT and has accepted a job offer. He took out a school loan for half of his total grad school tuition expenses and we gave him the other half plus we have paid all his living expenses during grad school. Our payments have totaled 18000 each year for our half of his annual tuition and 25000 each year for all of his living expenses.

I am typing this with cold fingers because I am realizing that our son should have been paying tax on 29000 of income from these gifts for each of the past two years, which he has not. DW and I interpreted the gift tax law incorrectly and have assumed that educational expenses were exempt, period. We sent the tuition money to our son and he paid the intitution. We transfered the living expenses into his checking account monthly.

Our son has kept his part of our agreement. He will graduate at the top of his class. He got the highest grade on his exit exam. We are proud of him and happy to have helped him. But it looks like he's got some returns to amend. He reported no income for the past two years.

DW just asked me, "What if he doesn't?"

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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by miamivice » Tue Feb 27, 2018 3:13 pm

praxis wrote:
Tue Feb 27, 2018 3:07 pm
Gill wrote:
Mon Feb 26, 2018 9:36 pm
Yes it does, unless it’s paid directly to the institution.
Gill
We have helped our son with grad school financially. He graduates this April with a Dr. in PT and has accepted a job offer. He took out a school loan for half of his total grad school tuition expenses and we gave him the other half plus we have paid all his living expenses during grad school. Our payments have totaled 18000 each year for our half of his annual tuition and 25000 each year for all of his living expenses.

I am typing this with cold fingers because I am realizing that our son should have been paying tax on 29000 of income from these gifts for each of the past two years, which he has not. DW and I interpreted the gift tax law incorrectly and have assumed that educational expenses were exempt, period. We sent the tuition money to our son and he paid the intitution. We transfered the living expenses into his checking account monthly.

Our son has kept his part of our agreement. He will graduate at the top of his class. He got the highest grade on his exit exam. We are proud of him and happy to have helped him. But it looks like he's got some returns to amend. He reported no income for the past two years.

DW just asked me, "What if he doesn't?"
You don't need to worry. Taxes, if any due, aren't paid by the recipient. They're paid by the giver.

But unless your estate is worth more than $22 million, you have nothing to worry about.

Do file the appropriate forms if necessary.

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praxis
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by praxis » Tue Feb 27, 2018 3:21 pm

miamivice wrote:
Tue Feb 27, 2018 3:13 pm
praxis wrote:
Tue Feb 27, 2018 3:07 pm
Gill wrote:
Mon Feb 26, 2018 9:36 pm
Yes it does, unless it’s paid directly to the institution.
Gill
We have helped our son with grad school financially. He graduates this April with a Dr. in PT and has accepted a job offer. He took out a school loan for half of his total grad school tuition expenses and we gave him the other half plus we have paid all his living expenses during grad school. Our payments have totaled 18000 each year for our half of his annual tuition and 25000 each year for all of his living expenses.

I am typing this with cold fingers because I am realizing that our son should have been paying tax on 29000 of income from these gifts for each of the past two years, which he has not. DW and I interpreted the gift tax law incorrectly and have assumed that educational expenses were exempt, period. We sent the tuition money to our son and he paid the intitution. We transfered the living expenses into his checking account monthly.

Our son has kept his part of our agreement. He will graduate at the top of his class. He got the highest grade on his exit exam. We are proud of him and happy to have helped him. But it looks like he's got some returns to amend. He reported no income for the past two years.

DW just asked me, "What if he doesn't?"
You don't need to worry. Taxes, if any due, aren't paid by the recipient. They're paid by the giver.

But unless your estate is worth more than $22 million, you have nothing to worry about.

Do file the appropriate forms if necessary.
Really?
Weve already paid income tax on the money we sent him.
I assumed he has to pay tax on the gift.
Why do we have to pay the tax twice?

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praxis
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Joined: Sun Sep 06, 2009 1:51 pm

Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by praxis » Tue Feb 27, 2018 3:23 pm

praxis wrote:
Tue Feb 27, 2018 3:21 pm
miamivice wrote:
Tue Feb 27, 2018 3:13 pm
praxis wrote:
Tue Feb 27, 2018 3:07 pm
Gill wrote:
Mon Feb 26, 2018 9:36 pm
Yes it does, unless it’s paid directly to the institution.
Gill
We have helped our son with grad school financially. He graduates this April with a Dr. in PT and has accepted a job offer. He took out a school loan for half of his total grad school tuition expenses and we gave him the other half plus we have paid all his living expenses during grad school. Our payments have totaled 18000 each year for our half of his annual tuition and 25000 each year for all of his living expenses.

I am typing this with cold fingers because I am realizing that our son should have been paying tax on 29000 of income from these gifts for each of the past two years, which he has not. DW and I interpreted the gift tax law incorrectly and have assumed that educational expenses were exempt, period. We sent the tuition money to our son and he paid the intitution. We transfered the living expenses into his checking account monthly.

Our son has kept his part of our agreement. He will graduate at the top of his class. He got the highest grade on his exit exam. We are proud of him and happy to have helped him. But it looks like he's got some returns to amend. He reported no income for the past two years.

DW just asked me, "What if he doesn't?"
You don't need to worry. Taxes, if any due, aren't paid by the recipient. They're paid by the giver.

But unless your estate is worth more than $22 million, you have nothing to worry about.

Do file the appropriate forms if necessary.
Really?
Weve already paid income tax on the money we sent him.
I assumed he has to pay tax on the gift.
Why do we have to pay the tax twice?
Why does the value of our estate matter in paying a gift tax?
(FWIW we are not in danger of exceeding $22M)

miamivice
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by miamivice » Tue Feb 27, 2018 3:26 pm

The gift tax works in combination with the estate tax, to tax folks that transfer over $22 million in wealth (current law) to others. The IRS doesn't want someone to gift $50 million just prior to death as a means to avoid estate taxes, so they require you to report all gifts over the threshold limits.

Since your estate is expected to be under $22 million, no taxes will be due. You'll just need to file paperwork with the IRS to report the gifts.

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FiveK
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by FiveK » Tue Feb 27, 2018 3:27 pm

praxis wrote:
Tue Feb 27, 2018 3:21 pm
Really? Yes.
Weve already paid income tax on the money we sent him.
I assumed he has to pay tax on the gift. That assumption is incorrect.
Why do we have to pay the tax twice? If you have to, it's because that's the law.
One pays tax twice on many things. E.g., all your W-2 income is taxed, but you pay sales tax when you buy things, etc.

But, as already mentioned, it is very unlikely that you will have to pay the tax even if you follow the letter of the law. Or is your estate going to have >$20 million? ;)

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StormShadow
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by StormShadow » Tue Feb 27, 2018 3:33 pm

Gill wrote:
Mon Feb 26, 2018 9:36 pm
Yes it does, unless it’s paid directly to the institution.
Gill
No, it does not.
Paying the college tuition DOES NOT count against the gift tax limit.
Paying for school loans DOES count against the gift tax limit.

School tuition and school loans are not the same thing.

Lastrun
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Lastrun » Tue Feb 27, 2018 3:54 pm

Here is the Treasury Regulation is anyone is interested. The examples at the end are helpful.

Treasury Regulation § 25.2503-6 Exclusion For Certain Qualified Transfer For Tuition Or Medical Expenses.

Treas. Reg. § 25.2503-6(a) In General. —
Section 2503(e) provides that any qualified transfer after December 31, 1981, shall not be treated as a transfer of property by gift for purposes of Chapter 12 of Subtitle B of the Code. Thus, a qualified transfer on behalf of any individual is excluded in determining the total amount of gifts in calendar year 1982 and subsequent years. This exclusion is available in addition to the $10,000 annual gift tax exclusion. Furthermore, an exclusion for a qualified transfer is permitted without regard to the relationship between the donor and the donee.

Treas. Reg. § 25.2503-6(b) Qualified Transfers

Treas. Reg. § 25.2503-6(b)(1) Definition. —
For purposes of this paragraph, the term “qualified transfer” means any amount paid on behalf of an individual--

Treas. Reg. § 25.2503-6(b)(1)(i) —
As tuition to a qualifying educational organization for the education or training of that individual, or

Treas. Reg. § 25.2503-6(b)(1)(ii) —
To any person who provides medical care with respect to that individual as payment for the qualifying medical expenses arising from such medical care.

Treas. Reg. § 25.2503-6(b)(2) Tuition Expenses. —
For purposes of paragraph (b)(1)(i) of this section, a qualifying educational organization is one which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and the regulations thereunder. The unlimited exclusion is permitted for tuition expenses of full-time or part-time students paid directly to the qualifying educational organization providing the education. No unlimited exclusion is permitted for amounts paid for books, supplies, dormitory fees, board, or other similar expenses which do not constitute direct tuition costs.

Treas. Reg. § 25.2503-6(b)(3) Medical Expenses. —
For purposes of paragraph (b)(1)(ii) of this section, qualifying medical expenses are limited to those expenses defined in section 213(d) (section 213(e) prior to January 1, 1984) and include expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care. In addition, the unlimited exclusion from the gift tax includes amounts paid for medical insurance on behalf of any individual. The unlimited exclusion from the gift tax does not apply to amounts paid for medical care that are reimbursed by the donee's insurance. Thus, if payment for a medical expense is reimbursed by the donee's insurance company, the donor's payment for that expense, to the extent of the reimbursed amount, is not eligible for the unlimited exclusion from the gift tax and the gift is treated as having been made on the date the reimbursement is received by the donee.

Treas. Reg. § 25.2503-6(c) Examples. —

The provisions of paragraph (b) of this section may be illustrated by the following examples.

Example (1)
In 1982, A made a tuition payment directly to a foreign university on behalf of B. A had no legal obligation to make this payment. The foreign university is described in section 170(b)(1)(A)(ii) of the Code. A's tuition payment is exempt from the gift tax under section 2503(e) of the Code.

Example (2)
A transfers $100,000 to a trust the provisions of which state that the funds are to be used for tuition expenses incurred by A's grandchildren. A's transfer to the trust is a completed gift for Federal gift tax purposes and is not a direct transfer to an educational organization as provided in paragraph (b)(2) of this section and does not qualify for the unlimited exclusion from gift tax under section 2503(e).

Example (3)
C was seriously injured in an automobile accident in 1982. D, who is unrelated to C, paid C's various medical expenses by checks made payable to the physician. D also paid the hospital for C's hospital bills. These medical and hospital expenses were types described in section 213 of the Code and were not reimbursed by insurance or otherwise. Because the medical and hospital bills paid in 1982 for C were medical expenses within the meaning of section 213 of the Code, and since they were paid directly by D to the person rendering the medical care, they are not treated as transfers subject to the gift tax.

Example (4)
Assume the same facts as in example (2) except that instead of making the payments directly to the medical service provider, D reimbursed C for the medical expenses which C had previously paid. The payments made by D to C do not qualify for the exclusion under section 2503(e) of the Code and are subject to the gift tax on the date the reimbursement is received by C to the extent the reimbursement and all other gifts from D to C during the year of the reimbursement exceed the $10,000 annual exclusion provided in section 2503(b).

[T.D. 7978, 49 FR 38541, Oct. 1, 1984; 49 FR 39843, Oct. 11, 1984]
Treasury Regulation § 25.2503-6 Exclusion For Certain Qualified Transfer For Tuition Or Medical Expenses.

Gill
Posts: 4073
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Gill » Tue Feb 27, 2018 4:04 pm

praxis wrote:
Tue Feb 27, 2018 3:07 pm
Gill wrote:
Mon Feb 26, 2018 9:36 pm
Yes it does, unless it’s paid directly to the institution.
Gill
We have helped our son with grad school financially. He graduates this April with a Dr. in PT and has accepted a job offer. He took out a school loan for half of his total grad school tuition expenses and we gave him the other half plus we have paid all his living expenses during grad school. Our payments have totaled 18000 each year for our half of his annual tuition and 25000 each year for all of his living expenses.

I am typing this with cold fingers because I am realizing that our son should have been paying tax on 29000 of income from these gifts for each of the past two years, which he has not. DW and I interpreted the gift tax law incorrectly and have assumed that educational expenses were exempt, period. We sent the tuition money to our son and he paid the intitution. We transfered the living expenses into his checking account monthly.

Our son has kept his part of our agreement. He will graduate at the top of his class. He got the highest grade on his exit exam. We are proud of him and happy to have helped him. But it looks like he's got some returns to amend. He reported no income for the past two years.

DW just asked me, "What if he doesn't?"
Relax. Your son doesn't have to do or pay anything. The only requirement is that you should have filed a gift tax return but, as others have said, there is no tax involved with that either.
Gill

montanagirl
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Location: Montana

Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by montanagirl » Tue Feb 27, 2018 8:13 pm

Gill wrote:
Tue Feb 27, 2018 11:02 am
RetiredCSProf wrote:
Tue Feb 27, 2018 1:28 am
My understanding is that the Gift Tax does not apply to dependents. So, answer depends partly on your child's age and whether she is a full-time student
I'm not sure where you acquired that understanding, but there is no such exclusion for dependents. If that was the case it would be a huge loophole for avoiding the estate tax.
Gill
The only exclusions are for spouses, and for charitable contributions, subject to limits.

montanagirl
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Location: Montana

Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by montanagirl » Tue Feb 27, 2018 8:14 pm

Gill wrote:
Tue Feb 27, 2018 11:02 am
RetiredCSProf wrote:
Tue Feb 27, 2018 1:28 am
My understanding is that the Gift Tax does not apply to dependents. So, answer depends partly on your child's age and whether she is a full-time student
I'm not sure where you acquired that understanding, but there is no such exclusion for dependents. If that was the case it would be a huge loophole for avoiding the estate tax.
Gill
The only exclusions are for spouses, and for charitable contributions, subject to limits.

montanagirl
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Location: Montana

Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by montanagirl » Tue Feb 27, 2018 8:16 pm

Deleted

TropikThunder
Posts: 877
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by TropikThunder » Tue Feb 27, 2018 8:44 pm

praxis wrote:
Tue Feb 27, 2018 3:23 pm
praxis wrote:
Tue Feb 27, 2018 3:21 pm
miamivice wrote:
Tue Feb 27, 2018 3:13 pm
praxis wrote:
Tue Feb 27, 2018 3:07 pm
Our son has kept his part of our agreement. He will graduate at the top of his class. He got the highest grade on his exit exam. We are proud of him and happy to have helped him. But it looks like he's got some returns to amend. He reported no income for the past two years.
DW just asked me, "What if he doesn't?"
You don't need to worry. Taxes, if any due, aren't paid by the recipient. They're paid by the giver.
But unless your estate is worth more than $22 million, you have nothing to worry about.
Really?
Weve already paid income tax on the money we sent him.
I assumed he has to pay tax on the gift.
Why do we have to pay the tax twice?
Why does the value of our estate matter in paying a gift tax?
(FWIW we are not in danger of exceeding $22M)
The term "gift tax" is unfortunate, I prefer "gift exclusion". Miamivice is correct, the tax (if there is one) will be paid by the estate upon your passing, not by the recipient (your son) and not by the giver directly (you). A married couple can pass on to their heirs an estate valued at up to $22M without an estate tax being due. The yearly gift exclusion is tied to the estate tax in that gifts above the yearly exclusion are counted as part of that $22M, while gifts under the limit are not counted. The exclusion is currently $14,000 per giver/receiver combination, meaning a couple can gift $28,000 per year to any number of individuals and still have the full $22M estate exclusion available on their passing. Gifts above the annual exclusion (evaluated on a yearly basis, not cumulatively) effectively use up part of the estate exclusion, but as one can see there's still plenty of exclusion left. :wink: The purpose of filing the overage is to inform the IRS so that they can keep a tally of how much of the estate exclusion has been "used early".

Gill
Posts: 4073
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Gill » Tue Feb 27, 2018 8:53 pm

TropikThunder wrote:
Tue Feb 27, 2018 8:44 pm
praxis wrote:
Tue Feb 27, 2018 3:23 pm
praxis wrote:
Tue Feb 27, 2018 3:21 pm
miamivice wrote:
Tue Feb 27, 2018 3:13 pm
praxis wrote:
Tue Feb 27, 2018 3:07 pm
Our son has kept his part of our agreement. He will graduate at the top of his class. He got the highest grade on his exit exam. We are proud of him and happy to have helped him. But it looks like he's got some returns to amend. He reported no income for the past two years.
DW just asked me, "What if he doesn't?"
You don't need to worry. Taxes, if any due, aren't paid by the recipient. They're paid by the giver.
But unless your estate is worth more than $22 million, you have nothing to worry about.
Really?
Weve already paid income tax on the money we sent him.
I assumed he has to pay tax on the gift.
Why do we have to pay the tax twice?
Why does the value of our estate matter in paying a gift tax?
(FWIW we are not in danger of exceeding $22M)
The term "gift tax" is unfortunate, I prefer "gift exclusion". Miamivice is correct, the tax (if there is one) will be paid by the estate upon your passing, not by the recipient (your son) and not by the giver directly (you). A married couple can pass on to their heirs an estate valued at up to $22M without an estate tax being due. The yearly gift exclusion is tied to the estate tax in that gifts above the yearly exclusion are counted as part of that $22M, while gifts under the limit are not counted. The exclusion is currently $14,000 per giver/receiver combination, meaning a couple can gift $28,000 per year to any number of individuals and still have the full $22M estate exclusion available on their passing. Gifts above the annual exclusion (evaluated on a yearly basis, not cumulatively) effectively use up part of the estate exclusion, but as one can see there's still plenty of exclusion left. :wink: The purpose of filing the overage is to inform the IRS so that they can keep a tally of how much of the estate exclusion has been "used early".
The annual exclusion is now $15,000.
Gill

MnD
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by MnD » Tue Feb 27, 2018 10:23 pm

I'm sure parents who paid for their kids college by cutting their kid a check and/or bankrolled a lightly used Toyota Camry are furiously filling out forms 709 as a result of this thread.

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Epsilon Delta
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Re: paying for child's college tuition - does it count towards the limit for gift tax?

Post by Epsilon Delta » Tue Feb 27, 2018 11:06 pm

c1over8 wrote:
Tue Feb 27, 2018 12:45 pm
The article beginning on page 2 provides insight on this issue:

http://www2.csudh.edu/rmalamud/Elder050111.pdf
Thank you, That was interesting.

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