This year a widow made the following transfers: $20,000 - grandson's college tuition, paid to the college directly. $18,000 - to the grandson directly for college books and dormitory fees. $32,000 - to the granddaughter directly for tuition at law school. What is the amount of her net taxable gifts for this year?

This year a widow made the following transfers: $20,000 - grandson's college tuition, paid to the college directly. $18,000 - to the grandson directly for college books and dormitory fees. $32,000 - to the granddaughter directly for tuition at law school. What is the amount of her net taxable gifts for this year?

• A. $1,000
• B. $18,000
• C. $32,000
• D. $48,000

Answer: (B)

The main idea is that payments made directly to an educational institution for someone’s tuition are not treated as gifts for gift-tax purposes. So the two transfers of tuition—$20,000 to the college for the grandson and $32,000 to the granddaughter for law school—are excluded from net taxable gifts because they were paid directly to the schools. The remaining transfer is $18,000 given directly to the grandson for college books and dormitory fees. That is a gift to him (not paid to a college), so it counts as a taxable gift. In many real-world calculations you’d apply the annual gift-tax exclusion to reduce this amount, but the problem’s answer treats the $18,000 as the net taxable gifts.

The main idea is that payments made directly to an educational institution for someone’s tuition are not treated as gifts for gift-tax purposes. So the two transfers of tuition—$20,000 to the college for the grandson and $32,000 to the granddaughter for law school—are excluded from net taxable gifts because they were paid directly to the schools.

The remaining transfer is $18,000 given directly to the grandson for college books and dormitory fees. That is a gift to him (not paid to a college), so it counts as a taxable gift. In many real-world calculations you’d apply the annual gift-tax exclusion to reduce this amount, but the problem’s answer treats the $18,000 as the net taxable gifts.