Helping Your Kid Pay for College? Avoid This Tax!

Helping your kid pay for college? Avoid this tax!

Maybe it’s grandparents helping them pay for college or some other family member – the same rules apply and you want to avoid this tax. We’re talking about a gift tax.

I’m estate planning attorney Michael Jenkins and I help our clients all the time deal with the state tax issues and gift taxes. Let me tell you a little bit about this. A gift tax is owed anytime you gift someone over a specified amount. This year, in 2021, that amount is $15,000. If you gift someone over that threshold you have to technically do a few things. You have to report it on your annual tax return, you have to pay taxes on the gift, or if you don’t want to pay taxes, you have to claim it against your lifetime exemption amount.

I said technically. Technically you have to do all these things. Would it really come up and bite you in the end if you didn’t? I don’t know. That’s kind of like saying, “Will I get audited or will I not?”. No one can really tell you that but if there’s a land mine that you can avoid stepping on let’s avoid stepping on it.

This usually comes up when someone is going off to college and you write them a check for their tuition to cover the semester. Whether that’s you or grandparents or whoever it may be, if that check is over $15,000 then technically the gift tax applies. The good news is there’s an easy way to avoid it and it’s probably the better route to go. If you’re paying for tuition, do not pay it to your child. The money cannot cross their hands. Instead, you should pay it directly to the institution. If you pay a qualified expense like tuition directly to the institution on their behalf, you are exempted from the gift tax. That $15,000 limit does not apply and you could still have that limit to gift them something else if you’d like.

I know this may not apply to everyone and if you’re in this scenario you’re fortunate but if you have any questions around the gift tax as it applies to college or as it applies elsewhere. It is a very nuanced area of law and there’s a lot of “if-then, then that”. If you have any questions feel free to give me a call, send me an email, send me a text. Whatever is easiest for you I’m here I’m always happy to help.

Michael Jenkins

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