College Tuition: Discover How Grandparents Can Help Their Grandchildren and Save Taxes Too


With college tuition coming due, families should consider tax efficient ways to pay for these expenses. Grandparents who wish to help their children with tuition costs can take advantage of some special gift tax breaks.

Grandparents have the usual annual present interest gift tax exclusion (now $14,000) and a lifetime exclusion (now $5,340,000). When a spouse joins in the gift (the called “spousal joinder”), these amounts double .

But these are not the only tax breaks available to a grandparent who wants to help the family. In addition, grandparents have an unlimited gift tax exemption for amounts paid for tuition. By using this special educational exclusion, such payments do not count against the annual gift tax or lifetime exclusions.

Here are the basic rules to qualifying these gifts for such unlimited educational exemption:

Unlimited Exclusion For Tuition Only

This exclusion from the gift tax for gifts of tuition is unlimited in amount. However, the scope of the exclusion applies to tuition only.

Books, Supplies and Other Items Not Covered

There is no exclusion for amounts paid for the following:

  • Board or other similar expenses that are not direct tuition costs.
  • Books
  • Supplies
  • Laboratory fees
  • Dormitory fees

See Treasury Regulations 25.2503-6(b)(2) for more details.

While Only Tuition Qualifies, This Educational Exemption Can Be For Part-Time or Full-Time Tuition

The gift tax is not imposed on amounts paid as tuition for a student to a qualifying domestic or foreign educational organization for the education or training of such person. See Code Section 2503(e)(1) and (2)(A).

Tuition payments for the student qualify where enrollment is part-time or full-time.

Qualifying Educational Organization

A qualifying educational organization is one which:

  • Normally maintains a regular faculty and curriculum and
  • Normally has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on.

See Code Section 170(b)(1)(A)(ii) and Treasury Regulation 25.2503-6(b)(2).

Direct Payment of Tuition to Educational Organization

The tuition payment must be made directly to the educational organization to qualify for this exclusion.

Critical Point:

Neither a payment to the student for delivery to the organization nor a payment to a trust for the student’s benefit for delivery to the educational organization will qualify for this exclusion. See Treasury Regulation 25.2503-6(b)(2) and (c) (Example 1).

Advance Payments:

Advance payments for future school years, made directly to a private school and used exclusively for the tuition expenses of designated students were excludable gifts where the payments were nonrefundable and the school would keep the funds if the children ceased to attend the school. TAM 199941013, PLR 200602002.

Prepayment of many years of private school tuition for a young child occurred in both cases. Since anything can happen with young children care should be exercised before making such a large prepayment.

No Special Relationship Required between Donor and Donee

This educational exclusion is permitted without regard to the relationship between the donor (person making the gift) and the donee (recipient of the gift).

Recipients (donees) need not be a dependent of the donor or even related to the donor.

No Impact on Annual Present Interest Gift and the Lifetime Gift Tax Exemption:

This exclusion does not use up the following other gift tax exclusions available to the donor:

1. Annual present interest gift tax exclusion of $14,000, and
2. Lifetime gift tax exclusion of $5,340,000

For more on gift giving readers can check out Gift Giving: Tax Advantages and Gifting Shares of Stock In A Bad Economy

Gift Tax Return

No gift tax return (Form 709) needs filing where the only gift during the tax year qualifies for the tuition gift tax exemption.

Section 529 Plans – Special Rules

Contributions to a Qualified State Tuition Program (a Section 529 plan) do not qualify for this educational expense exemption. See Code Section 529(c)(2)(A)(ii).

But a contribution to a Section 529 plan qualifies as a completed gift of a present interest that is eligible for the gift tax annual exclusion of $14,000.  If the spouse joins in the gift the exclusion would be $28,000. For more on this topic please read Section 529 Plans: Gift Tax Rules.

Final thoughts

This exclusion offers a very powerful tool for overall estate and tax planning for families.  Donors should consider it as part of a family’s overall estate and gift tax strategies.  Although not discussed, state inheritance taxes should be considered as part of this tax saving strategy.

Sit down with your experienced and skilled estate planning attorney or reach out to us before doing anything to make sure this planning tool is right for your specific situation and your overall estate plan.


Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Copyright © 2014 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.

4 responses to “College Tuition: Discover How Grandparents Can Help Their Grandchildren and Save Taxes Too

  1. Grandparents my not be helping their grandchildren or children in the way they think they are by paying tuition or other college costs directly to the qualifying institution. You are not taking into account the negative effect it can have on the financial aid status of their grandchild. Payments made to colleges by anyone other than the parents are assessed at a much higher rate. They are considered income of the student and will be assessed at 50%. This means that a $20,000 disbursement from the grandparents’ 529 Plan can result in a $10,000 increase in the Expected Family Contribution (EFC) for the year following the disbursement. The EFC is an out of pocket expense by the parents. It can affect the student’s financial aid eligibilty – need-based and even merit based. Unless the grandparents have enough to pay fro their grandchild’s entire college education, a better use of their college funds is to wait until the student’s senior year to make a disbursement. And even that may not work completely in all cases, since some schools (those that use the Institutional Method to determine EFC), may require disclosure of all trusts on which the student is a beneficiary – even before any disbursements are made, which of course, can increase a family’s EFC. Grandparents can also transfer the funds to their children to act as custodian for their grandchildren – even though they may incur a penalty or pay taxes on the gains for doing so. At least it then becomes the asset of the parent which is only assessed at 5.68% . It may be that the best thing grandparents can do for their children and grandchildren is to hold on to their money until the student graduates and then use the money to pay off student loans.


    • Judy: You make some very compelling points and financial aid considerations should definitely be part of the equation. This is the danger of people relying on information on the internet solely to make important financial decisions. Readers should get educated on the internet but ultimately a sit-down with tax and financial advisers is the best way to go when making financial decisions.


  2. Pingback: College Tuition: Discover How Grandparents Can Help Their Grandchildren and Save Taxes TooRich Sexton For Congress | RichSextonForCongress

  3. Pingback: College Tuition: Discover How Grandparents Can Help Their Grandchildren and Save Taxes Too | Boyd For Congress

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