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I recently payed off my college loans and now want to pay for the PLUS loans that my parents took out to pay for my education.

Does the gift tax apply if I pay the loan provider directly? I'm not sure if the following applies in this scenario:

In addition to the annual exclusion amounts, you also can give the following without triggering the gift tax: Gifts of educational expenses. These are unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies and
living expenses do not qualify.

Are there other tax implications? Possible tax deductions I can make?

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For a person to totally skip the gift tax provision, the money must be paid directly from the giver to the school. For example, if the grandparents want to pay for college they can send a tuition payment directly to the school. Even if the annual tuition is $30,000.

Normally, a person can give $14,000 to another person without having to reduce their lifetime exemption for estate tax. Let us say that tuition is $30,000 per year, room and board $15,000 per year, and books $1,000 per year: for a total of $46,000 per year. If they give all the money to the child, they will have to reduce their lifetime exemption by (46K- 14K (Grandparent 1)-14K (grandparent 2)) or $18,000 for that year.

If they send the tuition payment of 30K directly to the school, the remaining 16K can be covered by splitting the gift to the student between the two grandparents.

Now to your situation. The provision you quoted doesn't apply. Sending the payment to the bank isn't the same as sending it to the school. The quoted section is to allow a person to fund another persons education without having the money be commingled with all the other money the student has.

But you can send 14K to each parent, and they can use it to pay off the loan without you having to reduce your lifetime exemption. The good news is that as soon as January rolls around you can send another $14K to each parent. That mean you can send a total of $56,000 to them in the next 6 months. You can double the numbers if you are married and your spouse also send $14K to each of your parents every year.

Unfortunately, the payments are not a source of deduction for you. They are a gift to a family member, they aren't a donation to a charity.

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    In discussions of the gift tax, it's important to keep in mind that the lifetime exemption is very large (currently over $5 million). I think a lot of people don't realize this, and worry unnecessarily or arrange complicated transactions to avoid dipping into it, when in fact they may not have any realistic chance of ever using it up. – Nate Eldredge Aug 31 '15 at 13:20
  • Indeed - in particular with regards to gifts to parents. How many people realistically give millions of dollars - even back when it was $1MM - to their parents? – Joe Aug 31 '15 at 15:03
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    Separately: does it make any difference that this is a PLUS loan specifically taken out in the child's benefit? Is there any arrangement that could be made ahead of time, knowing this situation might come up, which would allow the PLUS loan proceeds to be 'loaned' to the child (to pay for whatever expenses) and then 'repaid'? – Joe Aug 31 '15 at 15:05
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    @Joe: "How many people realistically give millions of dollars to their parents?" You don't have to give millions to your parents for it to matter. What you give to your parents (that is above the annual exclusion) eats up your lifetime exemption that you can give to other people (e.g. your children). – user102008 Sep 1 '15 at 0:45

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