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How Will Morehouse College 2019 be Taxed on their Gifted Educations?

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Billionaire Robert F. Smith made the 2019 class of Morehouse College graduates very happy over the weekend, when he pledged to pay off their student debt.

Billionaire Robert F. Smith told nearly 400 graduates of the historically black, all-male, Morehouse College in Atlanta at their May graduation ceremony that he would pay off their student loan obligations, so they were free to pursue their next chapters. The gift is believed to be worth $40 million.

I met a lady last week who was at her grandson’s graduation from Morehouse College last month. To her great surprise, she learned, when the announcement was made, that he was a lucky recipient.

Fortunately, graduates likely won’t face any tax liabilities on the money. The IRS will consider the money a “gift.” The IRS policy is “no tax on receipt.” Typically, this means the person who receives the gift doesn’t have to pay tax on it.

Fox Business’ article “Will the IRS tax Robert F. Smith’s gift to Morehouse grads?” explains that the lender didn’t forgive the debt, so there’s no cancellation of indebtedness income. The students also didn’t do anything to “win” the debt repayment, such as winning a lottery or another competition.

However, Smith’s situation might be a little more complicated, depending on how he plans to pay the debts.

A gift is generally not considered tax deductible unless it’s given in the form of a charitable contribution. So, if Mr. Smith were to pay the checks directly from his personal account, he wouldn’t be able to claim a deduction. However, he could structure the payments in a way such that he’s giving the money to a charitable organization. This could be giving it to the school for the specific purpose of paying the students’ loans. In addition, Smith could create a private foundation and transfer the money that way.

To use a charitable deduction, Smith would have to give the money to an established charitable organization.

Another option is for Smith to claim that he made the decision to advance his business reputation with the thought of raising income for himself or his business. He started the private equity firm Vista Equity Partners and has an estimated net worth of $5 billion, according to Forbes.

The gift tax exclusion amount in 2019 is $15,000 per year. This means that gifts up to that amount are not usually taxable. For gifts above that, the giver may be required to fill out a Form 709, or gift tax form.

Research shows that outstanding student loan debt has doubled over the past decade to more than $1.5 trillion in 2018. This debt is now second only to the amount of mortgage debt held by Americans. Mr. Smith’s generosity will help the Morehead College Class of 2019 with a tremendous leg up.

Reference: Fox Business (May 20, 2019) “Will the IRS tax Robert F. Smith’s gift to Morehouse grads?”

See also https://www.downslawfirm.com/unexpected-fortune-whats-your-next-step/