Prepaid Tuition Price ranges May well Rescue Tons

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With education costs soaring to all time highs, making tuition payments for grandchildren and others can save lots of money in gift and estate taxes in the future – even when the donor is not alive when the tuition money is in fact used.

Through some background, the tax laws exempt tuition payments by grandparents or others from any gift taxes, provided certain requirements are met. First, the only  english and maths tuition online educational costs which are gift-tax free are tuition costs. The price 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 regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” Notice that there’s no requirement that the tuition costs be paid to a college or university. In fact, tuition payments for nursery school, private elementary school, and private senior high school may also qualify. It’s possible, too, that tuition payments for part-time courses, such as for example dance, theater, music, cullinary arts, and such will also qualify for the gift tax exemption.

So, how is this such much? In the first place, these tuition payments aren’t treated as taxable gifts, so you don’t need to bother about having them come underneath the annual gift tax exclusion. In fact, you may make tuition payments for your grandchildren or others and still give each of them the annual exclusion amount ($12,000 for 2006) as a birthday gift or whatever.

Second, if your estate is large enough to take into account federal estate taxes (currently in excess of $2 million, $4 million for a couple), then the total amount of the tuition payments will soon be excluded from your own estate upon your death. Put simply, your tuition payments will not be susceptible to something special tax when the payments are made, nor will they be susceptible to an estate tax upon your death. In addition, they will not be susceptible to any generation-skipping taxes (GST) upon your death

That’s decent deal by itself, 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 one case, a couple of grandparents had made payments to an exclusive school to cover tuitiion costs for their two grandchildren from pre-school through grade 12. There was an agreement between the institution and the grandparents indicating that the tuition payments wouldn’t be refundable even when the grandchildren failed to attend the institution each of these years. The total payments produced 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. In that case, the IRS told a taxpayer that prepayments of numerous years of tuition costs for his grandchildren wouldn’t be considered a gift.

While Technical Advice Memorandums and private letter rulings only connect with the taxpayer’s who request them, they are an excellent indication of the IRS’ position on specific tax matters. Here, it appears fairly clear that prepayment of multiple years of tuition costs will not be treated as a taxable gift by the IRS.

Now, let’s kind 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 weren’t treated as taxable gifts and, since the cash was removed from their estate, it was not susceptible to estate taxes upon their death. If the grandparents kept the cash until they died and then gave it to their grandchildren under their will, it would have been through probate first, then could have been susceptible 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 limited tax rate of 46%). In that case, prepaying the tuition costs resulted in a estate tax savings of roughly $83,260. Plus, the grandparents didn’t have to use up their annual gift-tax exclusion to obtain the estate tax savings.

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