With the start of the new school year, you may be thinking about making gifts to children or grandchildren to help them pay for school. For 2024, you have the ability to gift $18,000 per recipient without incurring gift tax.1 There are also ways to make tax free gifts of more than $18,000 per student, which you may also want to consider.
First, paying tuition directly to an educational organization on behalf of another person is exempt from the federal gift tax (and also does not count against the $18,000 annual gift tax exemption).2 Tuition payments may be made for primary, secondary and high school education, as well as for colleges and universities. Expenses paid for a preschool are generally not exempt, unless the program is determined to be educational (such as a Head Start program) and not primarily custodial. The payment must be made by the donor directly to the school — funds transferred to a child or its parent, or gifted to a trust and then paid by the trustee, do not qualify for the exemption. Payments are also limited to tuition — costs of books, housing, etc. do not qualify. The student need not attend school full time in order to benefit from such a gift, nor do you need to be related to the donee for the gift to be tax free.
Second, you can help students prepare for future educational expenses by making contributions to a “529 Plan” on behalf of the student. While gifts are generally limited by the annual gift tax exemption amount ($18,000), there is an exception that allows you accelerate gifts to a 529 Plan. The donor can elect to make up to five (5) years of contributions at one time (called a “5-year election”), front loading the donation and allowing it to grow faster. Making the election would allow an individual to contribute up to $90,000 ($180,000 for a married couple) to a 529 Plan in 2024. For the next five years, the donor will then report $18,000 of the gift on each successive year’s federal gift tax return (form 709). The money (and all growth on it) is removed from your estate – even if you retain control of the 529 Plan and have the power to change the beneficiary. However, if you die before the fifth year, that portion of the gift not yet eligible for the annual exemption will be taxable in your estate.
Finally, if the student does not use up all of his or her 529 Plan assets, the funds can be rolled over to support another related family member. In addition, under the Secure Act, starting in 2024 the student can roll up to $35,000 from the 529 plan into his or her ROTH IRA.
You do not need the assistance of your legal team or CPA to make these types of gifts, but you should notify your lawyer and your CPA so that they can help you to track and properly report gifts as necessary.
1IRC Section 2503(b).
2IRC Section 2503(e).
