Dear Liz: I adopted my granddaughter when she was 2. She has a number of student loans. Do I have the right to pay off her loans as her parent without tax consequences to her or to me?
Answer: Paying off someone’s student loans would be considered a gift. You may have to file a gift tax return, but you’re extremely unlikely to owe gift taxes.
The IRS requires you to file a gift tax return if you give any individual more than a certain amount in a year. (The 2023 annual exemption limit is $17,000.) You don’t owe gift taxes until the amount you give away above this annual limit exceeds the lifetime limit (which is 2023 is $12.92 million).
Your relationship doesn’t matter unless the recipient is your spouse. (You can give an unlimited amount to a spouse who is a U.S. citizen without gift tax consequences.)
Regarding the grandmother that would like to payoff her granddaughters student loans.
Agreed that if the funds go to the granddaughter, that would be a gift. However, if the grandmother paid the funds to the institution that originated the student loan. Would it not be a gift to the granddaughter? This would exempt Grandma from filing the gift tax return.
You may be thinking of the unlimited exemption for a family member’s medical expenses or education. Only tuition costs are eligible and the payment must be made directly to the educational institution, not to a student loan lender.