It is certainly no secret that the cost of attending college has increased significantly in the last several years. In fact, a 2015 study by US News suggested that the cost of tuition at both private and public institutions has risen by an average of 225 percent since 1995. With such drastic cost shifts, the number of donors seeking to financially assist those attending college has risen as well. Federal law stipulates that, regardless of the amount, donations of tuition paid to an educational institution on behalf of a particular student are not considered a taxable gift. Traditionally, individuals can “gift” someone with funds up to the amount of $14,000 before having to disclose the amount for federal gift-tax purposes (reporting a gift does not necessarily mean tax will be due). But, tuition-based donations operate outside of this gift-tax realm. Nevertheless, there are some vital caveats to consider before gifting money to a student for their continued education.

One primary condition is that the payments must be made directly to the institution; payments made to the student, parents or other guardians do not receive the benefit of being gift-tax free. Additionally, the payments must be made on tuition only; donations toward room, board, books, or other supplies and fees also do not qualify for the tax free guideline. One cautionary note is that large donations of tuition dollars may affect the amount of need-based financial aid the student is awarded. In some cases, financial aid can be slashed by as much as half if the institution considers the tuition payment, “cash support.” Thus, givers are encouraged to consult the receiving institution before making a payment.

Other caveats include items such as reimbursements and loan payments. Reimbursements to individuals who already paid tuition do not meet the requirements to be gift-tax free. And, payments on loans taken out by students or their legal guardians are considered a non-qualifying expense by the IRS. Transferring money into an educational trust fund through which the student pays for tuition or related expenses is an ineligible method as well.

While gifting money for educational purposes is always a benefit to the student, there are ways to allow certain “benefits” to the donor as well, and we are here to assist in that process. If you are thinking about making a contribution of this kind, please consider contacting me or your representative at Brammer & Yeend Certified Public Accountants before making any payments.