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Giving money to your loved one in order to indulge in higher education is not as easy as it may sound. In case you are planning to gift ‘money’ to an individual to help him/her use it for educational purpose, understanding the consequences of giving such a gift is important.

There are a number of rules and regulations featuring under the Internal Revenue Service. When money is given in a form of gift for educational purpose, there is taxation that you need to take care of. The tax itself is known as ‘Gift Tax’. Apart from this type of tax, there is Generation Skipping Transfer tax that also has to be looked into.

The tax is nothing but a certain percentage of the total amount of money one individual would be giving another as financial aid for taking care of costs associated with higher education. It is very important for people to understand how exactly this kind of taxation system works. Unfortunately, most of the people who fail to get in terms with taxation calculations often end up paying a lot more.

In order to understand the entire procedure in detail, let us take college funding into account. Most of the colleges across the United States of America receive funds and grants. These funds are later distributed for the welfare of each individual student.

For instance – every single year, the student is allowed to receive gifts that do not charge any kind of taxation. However, the gifts can only tally upto a certain amount of money. The moment the limit is exceeded, there will be taxation imposed upon the sender.

The maximum amount of money varies from one year to another. The final amount is calculated on the basis and fluctuations of inflation rate. Most of the people across the country make use of the 529 Plan. This plan is designed for savings purpose. Financial aid for higher education can be gifted in the form of bonds, stocks as well as cash.

When it comes to the Generation Skipping Transfer Tax, one generation is allowed by the government to gift its subsequent generation. For instance – being a grandparent, you are allowed to transfer financial aid to your grandchild.

This way, you will skip one generation in form of your own child and straightaway transfer the funds to the following generation. The Generation Skipping Transfer Tax is calculated on the basis of certain assumptions.

The government will assume the amount of money that would have been paid as tax had the amount reached your own child before it reached the grandchild. However, this particular taxation process was developed for those who fall in the category of people doing ‘financially well’.

The rules and regulations associated with Internal Revenue Service are pretty complex in nature. Hence, if you are planning to give a financial gift to a student to help cover up for higher educational costs, it is recommended you consult with a financial expert beforehand.