Funding university with appreciated shares
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Funding university with appreciated shares
Another thread brought up an idea that I wished to have vetted to see if it works. This involves using appreciated securities to pay for university tuition. It uses the idea proposed in this article https://www.forbes.com/sites/bobcarlson ... 8fea584f2f.
In this scenario, annual college tuition is $54k and housing, books, and other costs are $25k.
Funding sources: Appreciated VG mutual fund shares of $200k with an unrealized gain of $100k. A 529 plan with $100k. A bank account with $16k.
Each year for 4 years, the expenses are funded as follows:
Tuition $50k from gifting appreciated VG fund shares.
Tuition of $4k from the bank account (takes full advantage of AOTC).
Housing, books, and other costs of $25k from the 529.
At the end of the 4 years, $100k of unrealized gain ($15k of potential tax) is removed from your books, you receive an AOTC of $10k, and the 529 is fully depleted. Oh, and your child has received the bachelor's degree.
Are there any holes in this strategy? Has anyone done this where they paid tuition directly to the university with VG MF shares?
In this scenario, annual college tuition is $54k and housing, books, and other costs are $25k.
Funding sources: Appreciated VG mutual fund shares of $200k with an unrealized gain of $100k. A 529 plan with $100k. A bank account with $16k.
Each year for 4 years, the expenses are funded as follows:
Tuition $50k from gifting appreciated VG fund shares.
Tuition of $4k from the bank account (takes full advantage of AOTC).
Housing, books, and other costs of $25k from the 529.
At the end of the 4 years, $100k of unrealized gain ($15k of potential tax) is removed from your books, you receive an AOTC of $10k, and the 529 is fully depleted. Oh, and your child has received the bachelor's degree.
Are there any holes in this strategy? Has anyone done this where they paid tuition directly to the university with VG MF shares?
- TomatoTomahto
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Re: Funding university with appreciated shares
I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
I get the FI part but not the RE part of FIRE.
Re: Funding university with appreciated shares
We paid for much of college expenses for our children by selling shares with great gains. Of course, there were no taxes since realized capital gains were offset by previous realized capital losses from tax-loss harvesting or by selling shares that had losses in the first place.
I would not elevate this with the word "strategy" though. It is just normal and obvious.
And we had 529 plan money, too.
And as noted by TT, you don't have to gift shares unless you have no losses to use. We also gifted appreciated shares to our kids which they sold while in the 0% LT capital gains tax bracket.
I would not elevate this with the word "strategy" though. It is just normal and obvious.
And we had 529 plan money, too.
And as noted by TT, you don't have to gift shares unless you have no losses to use. We also gifted appreciated shares to our kids which they sold while in the 0% LT capital gains tax bracket.
Last edited by livesoft on Tue Jul 05, 2022 5:55 am, edited 1 time in total.
Re: Funding university with appreciated shares
No school is going to accept shares as tuition. Someone is going to have to cash them out and pay the taxes on the gains.
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Re: Funding university with appreciated shares
The shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.TomatoTomahto wrote: ↑Tue Jul 05, 2022 5:50 am I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
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Re: Funding university with appreciated shares
On your last point, how did you get around the Kiddie tax provisions?livesoft wrote: ↑Tue Jul 05, 2022 5:52 am We paid for much of college expenses for our children by selling shares with great gains. Of course, there were no taxes since realized capital gains were offset by previous realized capital losses from tax-loss harvesting or by selling shares that had losses in the first place.
I would not elevate this with the word "strategy" though. It is just normal and obvious.
And we had 529 plan money, too.
And as noted by TT, you don't have to gift shares unless you have no losses to use. We also gifted appreciated shares to our kids which they sold while in the 0% LT capital gains tax bracket.
- TomatoTomahto
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Re: Funding university with appreciated shares
I get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 amThe shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.TomatoTomahto wrote: ↑Tue Jul 05, 2022 5:50 am I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
I get the FI part but not the RE part of FIRE.
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Re: Funding university with appreciated shares
As yo may know, what is excluded from form 709 are gifts for "Tuition or medical expenses you pay for someone (the educational and medical exclusions)." If there was no way to utilize this ability, why would the provision exist?
Re: Funding university with appreciated shares
Tuition != donationrestingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 amThe shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.TomatoTomahto wrote: ↑Tue Jul 05, 2022 5:50 am I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
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Re: Funding university with appreciated shares
You are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 amI get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 amThe shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.TomatoTomahto wrote: ↑Tue Jul 05, 2022 5:50 am I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
- TomatoTomahto
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Re: Funding university with appreciated shares
You can specify “scholarships” as a specific use, but no legitimate university will allow you to specify “scholarship for Tomatino.” This idea is, imo, a non-starter.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:10 amYou are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 amI get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 amThe shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.TomatoTomahto wrote: ↑Tue Jul 05, 2022 5:50 am I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
I get the FI part but not the RE part of FIRE.
Re: Funding university with appreciated shares
You will find yourself on the uncomfortable side of tax court if you try this.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:10 amYou are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 amI get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 amThe shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.TomatoTomahto wrote: ↑Tue Jul 05, 2022 5:50 am I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
You cannot give a "gift" to the university that only benefits your family members.
While you can specify that it go to a scholarship fund, the process through which scholarships are awarded must be objective and completely at university's discretion.
- TomatoTomahto
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Re: Funding university with appreciated shares
ETA: full disclosure, I funded an older child’s (ie, past 26 when things change) education by a combination of annual gift exclusion for living expenses, direct tuition payments to the university, and direct payment for medical. We have a sharp CPA who knows of our capital gains situation. If the plan described in the OP would have been legal, he would have mentioned it.
I get the FI part but not the RE part of FIRE.
Re: Funding university with appreciated shares
Our Kiddies' parents are also in the 0% LT capital gains tax bracket.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:02 am On your last point, how did you get around the Kiddie tax provisions?
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Re: Funding university with appreciated shares
I will let you know. I am having that dialogue now with a very legitimate university.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:13 amYou can specify “scholarships” as a specific use, but no legitimate university will allow you to specify “scholarship for Tomatino.” This idea is, imo, a non-starter.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:10 amYou are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 amI get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 amThe shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.TomatoTomahto wrote: ↑Tue Jul 05, 2022 5:50 am I think you misunderstood the article. You can pay tuition directly to a university, which does not have to be reported as a gift to the beneficiary (ie, it can be in addition to the annual gift tax exclusion). It does not bypass capital gains on the underlying securities unless it’s a donation to the university, not tuition.
Technically, I cannot see where it falls apart under the tax code, as you gift the appreciated shares for the benefit of any students from red tomato land who are studying the science of tomato seed germination as informed by a specific red tomato genealogy. If Tomatino happens to be the only one in that category this term, well...
Re: Funding university with appreciated shares
Enjoy tax court!restingonmylaurels wrote: ↑Tue Jul 05, 2022 7:21 amI will let you know. I am having that dialogue now with a very legitimate university.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:13 amYou can specify “scholarships” as a specific use, but no legitimate university will allow you to specify “scholarship for Tomatino.” This idea is, imo, a non-starter.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:10 amYou are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 amI get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 am
The shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.
Technically, I cannot see where it falls apart under the tax code, as you gift the appreciated shares for the benefit of any students from red tomato land who are studying the science of tomato seed germination as informed by a specific red tomato genealogy. If Tomatino happens to be the only one in that category this term, well...
- TomatoTomahto
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Re: Funding university with appreciated shares
As I’ve often said, kids learn from watching their parents rather than listening to them. If this passes the university’s ethical standards, we can agree to disagree as to what constitutes a “very legitimate university.” If nothing else, truly legitimate universities have waiting lists of applicants who don’t require pretzel logic to make tuition payments in a legal manner.restingonmylaurels wrote: ↑Tue Jul 05, 2022 7:21 amI will let you know. I am having that dialogue now with a very legitimate university.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:13 amYou can specify “scholarships” as a specific use, but no legitimate university will allow you to specify “scholarship for Tomatino.” This idea is, imo, a non-starter.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:10 amYou are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 amI get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 am
The shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.
Technically, I cannot see where it falls apart under the tax code, as you gift the appreciated shares for the benefit of any students from red tomato land who are studying the science of tomato seed germination as informed by a specific red tomato genealogy. If Tomatino happens to be the only one in that category this term, well...
I get the FI part but not the RE part of FIRE.
Re: Funding university with appreciated shares
Ha! Ha! That wouldn't happen to be the University of Southern California, would it? I can see a legitimate university helping the FBI with some things.restingonmylaurels wrote: ↑Tue Jul 05, 2022 7:21 am I will let you know. I am having that dialogue now with a very legitimate university.
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Re: Funding university with appreciated shares
Based on the paragraph from the article:
"The main restriction on using the annual exclusion is that only gifts of “present interests” qualify for the exclusion. Basically, this means any gifts with strings or limits attached don’t qualify for the tax-free annual exclusion. You have to give full legal title to the property.".
Then kind of glancing over the tax code under "Contributions You Can't Deduct":
https://www.irs.gov/publications/p526#e ... 1000229696
"Tuition, or amounts you pay instead of tuition. You can't deduct as a charitable contribution amounts you pay as tuition even if you pay them for children to attend parochial schools or qualifying nonprofit daycare centers. You also can't deduct any fixed amount you must pay in addition to, or instead of, tuition to enroll in a private school, even if it is designated as a “donation.”"
It may seem more specifically in there somewhere about your case, but I don't think I would want to test the IRS as to whether donating to a school for a very specific purpose that only seem to benefit your child is materially different than paying the student's tuition directly.
"The main restriction on using the annual exclusion is that only gifts of “present interests” qualify for the exclusion. Basically, this means any gifts with strings or limits attached don’t qualify for the tax-free annual exclusion. You have to give full legal title to the property.".
Then kind of glancing over the tax code under "Contributions You Can't Deduct":
https://www.irs.gov/publications/p526#e ... 1000229696
"Tuition, or amounts you pay instead of tuition. You can't deduct as a charitable contribution amounts you pay as tuition even if you pay them for children to attend parochial schools or qualifying nonprofit daycare centers. You also can't deduct any fixed amount you must pay in addition to, or instead of, tuition to enroll in a private school, even if it is designated as a “donation.”"
It may seem more specifically in there somewhere about your case, but I don't think I would want to test the IRS as to whether donating to a school for a very specific purpose that only seem to benefit your child is materially different than paying the student's tuition directly.
Re: Funding university with appreciated shares
I don't think even the low ranked university that I worked for will allow such a scheme.TomatoTomahto wrote: ↑Tue Jul 05, 2022 7:43 amAs I’ve often said, kids learn from watching their parents rather than listening to them. If this passes the university’s ethical standards, we can agree to disagree as to what constitutes a “very legitimate university.” If nothing else, truly legitimate universities have waiting lists of applicants who don’t require pretzel logic to make tuition payments in a legal manner.restingonmylaurels wrote: ↑Tue Jul 05, 2022 7:21 amI will let you know. I am having that dialogue now with a very legitimate university.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:13 amYou can specify “scholarships” as a specific use, but no legitimate university will allow you to specify “scholarship for Tomatino.” This idea is, imo, a non-starter.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:10 amYou are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 am
I get that, but how do you get them to legally apply it to tuition?
Technically, I cannot see where it falls apart under the tax code, as you gift the appreciated shares for the benefit of any students from red tomato land who are studying the science of tomato seed germination as informed by a specific red tomato genealogy. If Tomatino happens to be the only one in that category this term, well...
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Re: Funding university with appreciated shares
My major professor directed money to a specific student for several years, and was told that it could not be considered as a gift.
This is second hand, but he wasn't a rich man, so I assume that if he could have gotten a deduction for it, he would have.
This is second hand, but he wasn't a rich man, so I assume that if he could have gotten a deduction for it, he would have.
Re: Funding university with appreciated shares
If this were possible, every parent that understood tax deductions and wanted to pay tuition would "donate" to the university in exchange for tuition.
There are reasons they send tuition bills and donation forms separately. Of course the university would love donations. But tuition isn't a donation, it's a bill to be paid.
There are reasons they send tuition bills and donation forms separately. Of course the university would love donations. But tuition isn't a donation, it's a bill to be paid.
Re: Funding university with appreciated shares
For some years I read a blog produced by a tax accountant at Forbes. One of his entries described exactly what you have in mind: a charitable donation for the support of education of students described so specifically only one student, the offspring of the donor, qualified. The IRS denied the deduction, the taxpayer appealed to Tax Court, and Tax Court upheld the IRS conclusion.restingonmylaurels wrote: ↑Tue Jul 05, 2022 7:21 amI will let you know. I am having that dialogue now with a very legitimate university.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:13 amYou can specify “scholarships” as a specific use, but no legitimate university will allow you to specify “scholarship for Tomatino.” This idea is, imo, a non-starter.restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:10 amYou are getting ahead of me with the specific details but I imagine just like any gift, it is targeted to a specific use.TomatoTomahto wrote: ↑Tue Jul 05, 2022 6:07 amI get that, but how do you get them to legally apply it to tuition?restingonmylaurels wrote: ↑Tue Jul 05, 2022 6:01 am
The shares are now owned by the 501c3 university who sells that shares and realizes the capital gain, not you.
Technically, I cannot see where it falls apart under the tax code, as you gift the appreciated shares for the benefit of any students from red tomato land who are studying the science of tomato seed germination as informed by a specific red tomato genealogy. If Tomatino happens to be the only one in that category this term, well...
Re: Funding university with appreciated shares
Topic has been exhausted. Members have pointed out that this is deceptive and will lead to tax implications.