Gift Tax Exclusion for Direct Payment of Education Expenses

Gifts made directly to an educational institution for tuition are not subject to any dollar limit. Thus, taxpayers can make them in addition to the annual gift tax limit ($12,000 in 2008).

The exclusion is limited to the payment of tuition. It is does not apply to room and board or other education costs. The donor must pay it directly to the educational institution.

This exclusion applies to any tuition. Thus, it applies to primary and secondary school costs.

In Letter Ruling 200602002, the IRS concluded that a grandparent who made nonrefundable prepaid tuition arrangements directly to a school for six grandchildren for their education through grade 12 qualified as exempt for the gift tax and the generation-skipping transfer tax.

Money Saving Tip. This provides an opportunity for a wealthy individual to exclude a substantial sum from gift and estate tax. Additionally, the donee need not be related to the donor for the exclusion to be effective.