Pre pay Tuition Expenditures Might Help you save A large amount
With education costs soaring to any or all time highs, making tuition payments for grandchildren and others can save lots of money in gift and estate taxes down the road – even when the donor isn’t alive when the tuition money is really used.
By way of some background, the tax laws exempt tuition payments by grandparents or others from any gift taxes, provided certain requirements are met. First, the sole educational costs that 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 straight to an academic organization that “normally maintains a typical faculty and curriculum and normally includes a regularly enrolled body of pupils or students in attendance at 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 reality, tuition payments for nursery school, private elementary school, and private senior school could also qualify. It’s possible, too, that tuition payments for part-time courses, such as for instance dance, theater, music, cullinary arts, and such may also qualify for the gift tax exemption.
So, how is this such a good deal? In the first place, these tuition payments aren’t treated as taxable gifts, so you don’t have to be worried about having them come under the annual gift tax exclusion. In reality, you may make tuition payments for the 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 take into account federal estate taxes (currently in excess of $2 million, $4 million for a couple), then the quantity of the learn maths and english online tuition payments is likely to be excluded from your own estate upon your death. Put simply, your tuition payments won’t be subject to a present tax when the payments are manufactured, nor will they be subject to an estate tax upon your death. Furthermore, they will not be subject to any generation-skipping taxes (GST) upon your death
That’s decent deal on it’s own, 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 specific case, a set of grandparents had made payments to an exclusive school to cover tuitiion costs for their two grandchildren from pre-school through grade 12. There is an agreement between the institution and the grandparents indicating that the tuition payments would not be refundable even when the grandchildren failed to go to the institution each of the 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 an exclusive 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 connect with 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 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 were not treated as taxable gifts and, since the money was removed from their estate, it wasn’t subject to estate taxes upon their death. If the grandparents kept the money until they died and then gave it with their grandchildren under their will, it could have been through probate first, then could have been subject to a federal estate tax and then, possibly, a generation-skipping tax – all before maybe it’s used by the grandchildren.
If the grandparents had a fairly large estate, say larger than $4 million, then a estate taxes paid on that $181,000 will be roughly $83,260 (based upon a marginal tax rate of 46%). For the reason that case, prepaying the tuition costs resulted within an 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.