Pay as you go Tuition Charges Can easily Help save Thousands
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. First, tutors online math the only real educational costs which are gift-tax free are tuition costs. The cost of room and board, books, and other educational expenses aren’t exempt.
Second, the tuition costs must certanly be paid right to an educational organization that “normally maintains a regular faculty and curriculum and normally features a regularly enrolled body of pupils or students in attendance at where its educational activities are regularly carried on.” Notice that there surely 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 high school can also qualify. It’s possible, too, that tuition payments for part-time courses, such as dance, theater, music, cullinary arts, and such will also qualify for the gift tax exemption.
So, how is this such a great deal? In the very first place, these tuition payments aren’t treated as taxable gifts, which means you don’t need certainly to be concerned about having them come beneath the annual gift tax exclusion. In fact, you can make tuition payments for your grandchildren or others and still give each of them the annual exclusion amount ($12,000 for 2006) as a birthday gift or whatever.
Second, if your estate is large 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 be excluded from your estate upon your death. Quite simply, your tuition payments will not be at the mercy of something special tax once the payments are created, nor will they be at the mercy of an estate tax upon your death. Additionally, they’ll not be at the mercy of any generation-skipping taxes (GST) upon your death
That’s pretty good deal alone, but here’s an additional 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, a set of grandparents had made payments to an exclusive school to cover tuitiion costs because of their two grandchildren from pre-school through grade 12. There clearly was an agreement between the institution and the grandparents indicating that the tuition payments wouldn’t be refundable even if the grandchildren failed to attend the institution each of the years. The full total payments created by the grandparents amounted to over $181,000 over a two-year period.
Recently, the Internal Revenue Service issued an exclusive letter ruling that supports the Technical Advice Memorandum cited above. Because case, the IRS told a taxpayer that prepayments of many years of tuition costs for his grandchildren wouldn’t be described as a gift.
While Technical Advice Memorandums and private letter rulings only connect with the taxpayer’s who request them, they’re a good indication of the IRS’ position on specific tax matters. Here, it appears fairly clear that prepayment of multiple years of tuition costs will not 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 cash was taken off their estate, it was not at the mercy of estate taxes upon their death. If the grandparents kept the cash until they died and then gave it with their grandchildren under their will, it might have experienced probate first, then could have been at the mercy of a federal estate tax and then, possibly, a generation-skipping tax – all before it could be utilized by the grandchildren.
If the grandparents had a reasonably large estate, say bigger than $4 million, then your estate taxes paid on that $181,000 will be roughly $83,260 (based upon a marginal tax rate of 46%). Because 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 get the estate tax savings.