Ibrahim Gardner
Many parents want to help their children pay off their student loans, but they worry about the tax implications. The good news is that there are ways to do this without triggering a gift tax. For example, tuition paid directly to qualifying educational institutions in the US or overseas is not subject to gift tax. If a parent is a cosigner, paying the student loans will not trigger a gift tax because the parent is paying off a debt, not giving a gift. Additionally, parents can give their child up to $17,000 per year without triggering the gift tax, or $34,000 per year if filing taxes jointly.
| Characteristics | Values |
|---|---|
| Gift tax exclusion limit in 2022 | $16,000 |
| Gift tax exclusion limit in 2023 | $17,000 |
| Gift tax exclusion limit in 2024 | $18,000 |
| Gift tax exclusion limit for married couples in 2022 | $32,000 |
| Gift tax exclusion limit for married couples in 2023 | $34,000 |
| Gift tax exclusion limit for married couples in 2024 | $36,000 |
| Lifetime gift tax exclusion limit in 2022 | $12.06 million |
| Lifetime gift tax exclusion limit in 2023 | $13 million |
| Lifetime gift tax exclusion limit in 2024 | $13 million |
| Lowest lifetime gift tax exclusion limit proposed by politicians | $3 million |
| Co-signing a loan | No gift tax |
| Paying tuition fees directly to the institution | No gift tax |
| Paying off student loans without triggering gift tax | Possible |
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Gift tax exclusion
The gift tax is a federal tax assessed on transfers of cash or property valued above a certain threshold, which is referred to as the exclusion limit. The gift tax is paid by the giver of the gift, not the recipient. The annual gift tax exclusion is the amount of money an individual can give away each year before the gift tax is applied. For instance, in 2023, the annual gift tax exclusion limit was $17,000, and in 2024, it increased to $18,000. In 2025, the annual exclusion limit is $19,000. This amount is per recipient, meaning that an individual could give $19,000 to several different people in a single year without filing a gift tax return.
If an individual gives away more than the annual exclusion amount in cash or assets to any one person during the tax year, they will need to file a gift tax return in addition to their federal tax return for the following year. This is done by submitting IRS Form 709 to disclose the gift on a gift tax return. The amount of the contribution that exceeds the annual limit will then be subtracted from the individual's larger lifetime gift tax exclusion.
In addition to the annual gift tax exclusion, there is a lifetime gift tax exclusion. This is the amount of money an individual can give away during their lifetime before the gift tax is applied. For instance, in 2025, the lifetime gift tax exclusion is $13.99 million per person, up from $13.61 million in 2024.
There are some exceptions to the gift tax. Gifts between spouses are not included in the gift tax. This means that if an individual is married and their spouse pays off their loans, it would not trigger a gift tax event. Tuition paid directly to qualifying educational institutions in the United States or overseas is also not subject to gift tax.
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Unified Credit
The unified credit, also known as the unified transfer tax, is a critical aspect of effective financial planning. It combines two separate lifetime tax exemptions: the gift tax exclusion and the estate tax exemption. The unified credit determines how much of an individual's estate can be transferred tax-free during their lifetime or upon their death. In other words, it represents the total amount that can be transferred through gifts or estate transfers without incurring additional taxes.
The unified credit can be utilized for inter-vivos gifts (given while the giver is alive) or bequests at death. For example, an individual with a unified credit of $11.7 million could give each of their four children a taxable gift of $500,000 during their lifetime. By applying the unified credit, they would avoid paying gift taxes on the $2 million in gifts. However, their lifetime unified credit would be reduced to $9.7 million. If they later pass away and leave their children an estate worth $11.5 million, their children would be responsible for paying estate taxes on the difference of $1.8 million.
The unified credit changes over time, influenced by regulations related to estate and gift taxes. As of 2024, the unified credit exemption is up to $13.61 million per individual or $27.22 million for married couples. However, this exemption is scheduled to revert to its pre-2018 level on January 1, 2026, reducing the exclusion amount by approximately half to around $6 million per individual.
It is important to note that the unified credit does not include or apply to annual gift tax exclusions. These exclusions allow individuals to give away tax-exempt gifts up to a certain amount per recipient annually without reducing their unified credit limit. As of 2024, the annual gift tax exclusion is $18,000 per recipient.
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Co-signing loans
If you are considering co-signing a loan for your child, it is important to understand the benefits and drawbacks. As a co-signer, you are equally responsible for payments as your child. Your credit score and your child's will be impacted by the loan. This is a chance for your child to build their credit score.
The benefit of co-signing your child's loan is twofold: you help your child get approved, and you may help them receive a better interest rate. If the co-signer dies, the child, as the primary borrower, will have full responsibility for the loan. However, if you take out a parent loan, you are the only one responsible for payments, and only your credit score will be impacted.
Co-signing a loan for your child and then making the payments for them can be a way to avoid triggering a gift tax. This is because the money is not considered a gift but rather a payment of a debt.
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Tuition payments
If parents are not paying tuition fees directly, but are instead giving money to their child to pay off their student loans, they may be liable for gift tax if they give over a certain amount. The gift tax exclusion for 2023 is $17,000, so an individual can give up to this amount without paying gift tax. This exclusion applies to individuals, so a married couple could give up to $34,000 to one person without paying gift tax.
If parents give more than this amount, they would need to file Form 709 with the IRS. However, it is still unlikely that they would owe any tax on the gift, as the lifetime gift tax exclusion is currently $13 million. This means that gifts are only taxed if the total amount of gifts over a lifetime, combined with any assets left behind, exceed this limit.
There are other ways for parents to help their children with student loans without triggering gift tax. They could co-sign for their child's loans and then make the payments when they become due after college. Employers can also contribute to student loans without it counting as taxable income, up to a certain amount per year.
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Tax-free gifts
As a parent, you can pay off your child's student loans without triggering a gift tax by following certain strategies. Firstly, if you co-sign your child's loan, any payments you make will not count as a gift, and you won't need to worry about gift tax rules. This is because, in the eyes of the IRS, you are paying off a debt rather than giving a gift.
Secondly, you can make use of the annual gift tax exclusion. For 2022, this amount was $16,000 per individual, meaning a married couple could give up to $32,000 to their child without incurring gift taxes. In 2023, the annual exclusion increased to $17,000 per individual, allowing a married couple to give up to $34,000 tax-free. It's important to note that this exclusion applies to gifts made to each person, so if you have multiple children, you can give each of them up to $17,000 without triggering gift taxes.
Additionally, tuition payments made directly to qualifying educational institutions are not subject to gift tax, regardless of the amount. This means that if you pay your child's school bills directly, it won't be considered a gift, and you can avoid gift taxes.
If you want to give more than the annual exclusion amount, you may need to file Form 709 with the IRS. However, it's unlikely that you'll owe any tax on the gift unless your total gifts over your lifetime, combined with your assets, exceed the lifetime exclusion, which was $5.45 million in 2016 and is $12.06 million in 2022.
Another option to consider is using the Unified Credit. This allows you to avoid estate taxes up to a certain amount once you pass away. For example, if you want to help your child pay off $40,000 in student loan debt, you would owe taxes on the amount exceeding the annual exclusion ($23,000). Instead of paying these taxes immediately, you can apply them to your lifetime Unified Credit amount, which will be reduced accordingly.
It's worth noting that employers can also contribute to student loan repayment without triggering gift taxes. Through the CARES Act, employers can provide a pre-tax benefit similar to 401(k) contributions, and they can contribute up to $5,250 per employee per year through 2025.
While there are ways to avoid gift taxes when paying off student loans, it's always best to consult with a qualified tax advisor to ensure you're following IRS rules and making the best financial decisions for your situation.
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Frequently asked questions
Yes, parents can pay off their child's student loans without triggering a gift tax if the amount paid is under the annual gift tax exclusion limit. In 2023, this limit is $17,000 for an individual and $34,000 for a married couple filing jointly.
If the amount paid by the parents exceeds the annual gift tax exclusion limit, they may be liable for a federal gift tax. However, they can utilize strategies such as co-signing the loan, using the Unified Credit, or making tuition payments directly to the educational institution to avoid triggering the gift tax.
Yes, it is important for parents to consider their financial situation and retirement plans before offering to pay off their child's student loans. Working with a financial planner can help them make an informed decision and explore alternative options, such as income-based repayment plans.
The child whose student loans are paid off by their parents does not incur any tax liability. The gift tax, if applicable, is the responsibility of the parents as the givers, not the child as the recipient.
