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Does the IRS care if someone else pays your student debt?

The president of Morehouse College has stated that he will cover millions of dollars of student loan debt for graduates of the university. The offer is a kind gesture that can pay off rewards in the future. The beneficiaries will be able to move forward with their future without the heavy burden of student loans. Instead of working to pay back this debt, these individuals can focus on the future.

Unfortunately, no good deed goes unpunished. The Internal Revenue Service (IRS) can tax gifts. The agency considers a gift any transfer or money or something that is the equivalent of money from one individual or business to another. As such, this type of tax could apply when a wealthy college president decides to cover the bill for your education.

Not everyone will find themselves in this situation. It is much more common for students to have parents offer to cover the expense of education. Parents who directly cover the cost of tuition can generally exclude the expense from gift tax calculations. However, if a parent offers to pay off student loans gift taxes may apply. The gift tax could be avoided in this situation if the parent stays within the annual exclusion limit. For 2018 and 2019, the government has set the limit at $15,000. As a result, a parent can generally provide up to $15,000 per year without having to file a tax return with the IRS. If both parents help out, each parent can provide this same amount resulting in a total of $30,000.

There are some exceptions, most notable if the parents have already exceeded their lifetime giving limit of approximately $5 million. A failure to abide by the IRS’ and state agency’s gifting rules can result in an audit and potential tax penalties.

Ultimately, the answer to the question posed in the title of this post is — sometimes.

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