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Lev, Tax Preparer
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Experience:  Personal Investment, Tax Preparation
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I would like to reiterate on the last question I asked however

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I would like to reiterate on the last question I asked however I am interested to know more about the Gift Tax and the exemption of giving money towards tuition. Here is what I know; The Internal Revenue Code provides a gift-tax exclusion for amounts paid on behalf of an individual as tuition to educational organizations. The exclusion is available regardless of the relationship between the donor (the person making the gift) and donee (the person getting or benefiting from the gift) and is in addition to the annual $13,000 per person per year gift-tax exclusion. The exclusion only applies to tuition costs and does not apply to amounts paid for books, supplies, dormitory fees, board or other similar expenses that do not constitute direct tuition costs.

My question is in the language of this limitation: it does not apply to tuition expenses previously paid to the qualifying educational institution by the donee, which are reimbursed by the donor. In addition, if funds are transferred by the donor to a trust providing for distributions to be made by the trustee for tuition expenses incurred by a trust beneficiary, the transfer is not a direct transfer to an educational organization and thus does not qualify for the exclusion. (In need of plain English here)

The plan I would like to execute is to become a 501(c)4 nonprofit that uses public generated donations to set up planned giving to colleges and universities to cover the gap for students when scholarships and grants aren't enought to cover the full cost each year. When we aren't paying out the gifts we would like to have the money invested (not a trust).
I understand your expertise isn't in nonprofit, however I just wanted to lay out the model to give you a better beer standing of what it is we plan to do.

Thank you
Submitted: 3 years ago.
Category: Finance
Expert:  Lev replied 3 years ago.
Your understanding is perfectly correct.
For "plain English" explanation - I would refer not to the statute - but to the IRS publication 950
Generally, the following gifts are not taxable gifts:
•Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
•Tuition or medical expenses paid directly to an educational or medical institution for someone else,
•Gifts to your spouse,
•Gifts to a political organization for its use, and
•Gifts to charities.

So relating to your situation - only payments for tuition and only payments made directly to an educational institution may be classified as not taxable gifts.
In additional - you might be aware that annual gift exclusion is $14,000 starting 2013.
You are also correct - that unless that is a gift to a spouse - relations between donors and donees are irrelevant.

Internal Revenue Code section 501(c)(4) provides for the exemption of two very different types of organizations with their own distinct qualification requirements. I doubt that you may use 501(c)(4) to overcome gift tax circumstances.

501(c)(4) are:
•Social welfare organizations: Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, and
•Local associations of employees, the membership of which is limited to the employees of designated person(s) in a particular municipality, and the net earnings of which are devoted exclusively for the promotion of social welfare.

Here are some examples of social welfare organizations provided by the IRS:
•An organization operating an airport that serves the general public in an area with no other airport and that is on land owned by a local government, which supervises the airport’s operation,
•A community association that works to improve public services, housing and residential parking; publishes a free community newspaper; sponsors a community sports league, holiday programs and meetings; and contracts with a private security service to patrol the community,
•A community association devoted to preserving the community’s traditions, architecture and appearance by representing it before the local legislature and administrative agencies in zoning, traffic and parking matters,
•An organization that tries to encourage industrial development and relieve unemployment in an area by making loans to businesses so they will relocate to the area and
•An organization that holds an annual festival of regional customs and traditions.
To be tax-exempt as a social welfare organization described in Internal Revenue Code (IRC) section 501(c)(4), an organization must not be organized for profit and must be operated exclusively to promote social welfare. The earnings of a section 501(c)(4) organization may not inure to the benefit of any private shareholder or individual.
To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).

Let me know if you need any clarification.
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 28081
Experience: Personal Investment, Tax Preparation
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