I've heard that a grandparent can pay a grandchild's tuition directly to the college without any gift tax problems. Is this true?


Yes. The general rule for gifts is that any gift over the annual federal gift tax exclusion amount ($14,000 for individual gifts and $28,000 for joint gifts in 2016) is subject to federal gift tax and generation-skipping transfer tax (GSTT).

But an exception to this rule exists for tuition payments made directly to a qualifying educational organization to cover a student's tuition expenses. Such payments are exempt from federal gift tax and GSTT, even if they exceed the annual gift tax exclusion amount. The key is that payments must be made directly to the college. You will not qualify for the exclusion if you gift the money directly to the student with instructions to apply it to tuition. The exclusion does not cover room and board expenses, books, or supplies.

However, keep in mind that direct payments to an educational institution on behalf of a student may result in a reduction in the student's eligibility for need-based financial aid. Also, this type of gift may still be subject to state gift tax and/or GSTT. Consult a tax attorney in your state for more information.

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