Yes, there's a tax if you pay for a grandchild’s college education — but take notes
Q. My husband and I want to help pay for my grandson’s college costs but a friend of mine at lunch said that if I gift more than $15,000 to him, there is a tax. Is there really a tax if I pay for my grandson’s college? — Cindy in Rockledge
A. Cindy, there is a tax on gifts, but you should be able to pay for your grandson’s college without incurring the tax.
There are several gifts you can make that are completely exempted from the gift tax. You may gift an unlimited amount to your spouse or a qualified charity. Specific to your question, a cash gift paid directly to a university for tuition on behalf of a student is exempt from the tax. So is a gift paid directly to an institution such as a hospital for certain health care expenses.
When a gift goes to a non-spouse, non-charitable recipient for general use by the receiver, the gift tax can apply if it exceeds the “annual gift tax exclusion.” For 2022, the exclusion is $16,000. This limit is indexed to inflation. It was $15,000 last year.
The exclusion allows you to gift up to $16,000 of assets each to as many people as you like without incurring a gift tax. Because the exclusion is per person, your spouse is also able to gift $16,000 to as many people as he would like. That simple construct can be employed in creative ways.
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For instance, say you wanted to help your daughter and her husband buy a house. Both you and your husband could give your daughter $16,000 for a total gift of $32,000. Since the exemption is per person, you could also give your son-in-law $16,000 each, making the total tax-free transfer $64,000.
Further, the exemption is per year so if they don’t plan to buy until 2023, and additional $64,000 can be gifted without gift tax after Jan. 1, 2023. So, yes there is an annual limit, but with some planning, it is possible to transfer more under the right circumstances.
These dollar amounts refer to the fair market value of the asset transferred. Gifts such as what I just described do not necessarily need to be made in cash. In some cases, gifting shares of stock, other investments, or other assets can have additional tax benefits.
Even if you go over the annual limit, you may avoid gift taxes by filing Form 709 and using some of your “unified credit.” Let’s go back to the house buying example and pretend your daughter and son in law need $100,000 right away to buy their dream home. You and your husband maximize the use of the annual exclusion to make gifts of $64,000 gift tax-free.
You could also gift them the additional $36,000 free of gift tax by using some of your credit. For 2022, the unified credit equates to $12,060,000 of assets per person. Assuming you have not yet used any of your credit prior to this, you could gift the additional $36,000 and would still have $12,024,000 that could be left to your non-spouse, non-charitable heirs or gifted during your lifetime free of estate or gift tax. Your husband would still have his full $12,060,000 available.
Take note that without congressional action, the unified credit is scheduled in 2026 to reduce back to the prior scale when the Trump era tax provisions expire. Estimates put the 2026 exempted amount at around $6 million per person. Families with significant assets and the desire to keep estate and gift taxes to a minimum should consider gifting techniques that take advantage of this current higher exemption.
Nonetheless, with some planning and proper accounting, gifting larger amounts without paying gift taxes is easily done for most Americans under current law.
Dan Moisand, CFP®, is a past national president of the Financial Planning Association and has been featured as one of America’s top financial planners by at least 10 financial planning publications. He can be reached at www.moisandfitzgerald.com or 321-253-5400, Ext. 101.
This article originally appeared on Florida Today: Yes, you'll pay a tax to fund a grandchild's education — but read on
