This letter is in response to your concerns abut the federal gift tax impact on providing
support to your niece and nephew who are presently in college.
A gift tax exclusion is available for any amount paid on behalf of an individual as
tuition to a qualifying educational organization for that individual's education. The
exclusion is limited to tuition and does not include books, supplies, dormitory fees,
board, or similar expenses which do not constitute direct tuition costs.
The amount of this exclusion is unlimited. Consequently, if the tuition for your niece is
$15,000, you could provide the entire amount under the protection of this exclusion. If
you wish to provide additional funds to cover room and board, you could provide up to
$10,000, the amount protected from gift taxation under the annual donee exclusion. This
$10,000 amount is indexed for inflation (in $1,000 increments) for gifts made after 1998.
The tuition payment must be made directly to the educational institution to enable
qualification for this exclusion. It cannot be paid to your niece or nephew to reimburse
them for costs they have paid from other sources. Probably the easiest way to accomplish
this is to give your niece or nephew a check payable to the school, which she or he can
take to the school's payment office at the time of their registration. Some schools
require earlier payment, in which event you could send the check directly to the school.
I hope that this advice is adequate for your purposes. Please contact me if you have
further questions.