Capital Gains Tax Avoidance via Tuition Payment

Dave

I found an interesting blog comment by The White Coat Investor (http://whitecoatinvestor.com):

"As many readers know, in some ways investing in tax-efficient stock mutual funds can be a form of tax-deferral. That deal gets even better when you can eliminate the capital gains taxes at the end. You can do that by dying, when your heirs get the step-up in basis, or you can do it by using those appreciated shares for your charitable contributions. However, I had never considered using them to pay tuition. But since many colleges, medical schools, and even private grade schools are technically 501(c)3s, which don't pay capital gains taxes when selling the appreciated shares you gave to them (as a tuition payment), it's really the same thing as giving the shares to your church or a favorite international aid charity. Better than a 529? Probably not, but certainly a great way to flush the low-basis shares out of your portfolio. So the next time you pay tuition, rather than using your cash on hand, (or worse, liquidating low-basis shares to use cash for the payment), contact the school to see if you can pay the bill with a transfer of shares. They get their tuition, you get your usual tuition-related tax breaks, and you avoid those capital gains taxes."

The only catch seems to be that the institution be a 501(c)3 and must accept the payment by direct transfer.

Thoughts?

/dave

msf

I can't find that exact column anywhere. That problem aside, IMHO (and I'm neither an accountant nor a lawyer, nor is this advice), I don't think this will fly.

What you are doing seems to constitute a sale of a security. It may not be a cash transaction, but it does seem to be quid pro quo - you are getting something (educational services) for something (stock). That's a sale, and would seem to be taxable.

(The IRS frowns on below market transactions to circumvent taxes, so I would not try to negotiate with the institution to offer you a discount on the shares.)

Here's a Fairmark thread that may help (note: QEE = qualified education expense). I suggest you skip to the last three responses, that back up what I'm saying here. (They're no more authoritative, but may give a slightly different slant.)

msf

What the earlier part of the Fairmark thread is talking about is getting the "usual tuition-related tax breaks". The posters there are asserting that you get those breaks only with payments in cash, not stock. If correct, that would seem to contradict the other part of your column - the first part being that you avoid cap gains, the second that you get tuition breaks.

Indeed, cash seems to be required according to the IRS:
http://www.irs.gov/Individuals/Qualified-Ed-Expenses

(well, cash, check, credit card, or loan proceeds are all acceptable forms of payment)

Dave

Hmmm. Yes, the blog does not seem to have this commentary. (yet?) It came from his monthly 'Newsletter' sent today, Sept 3rd.

This issue of his newsletter can be viewed at http://us4.campaign-archive1.com/?u=106bf0eb2d98400b0754830dc&id=ad59ec9a5f

The item is towards (at) the end, labelled "Tip of the Month"

/dave

msf

It seems to be exactly what you wrote, and I'm still of the belief it's exactly wrong.

If this is such a good strategy, it's curious that it's nowhere to be found, while there are so many articles explaining how to carefully gift appreciated stock to a student who can sell it with little tax due.

See, e.g. https://www.kitces.com/blog/liquidate-appreciated-securities-tax-free-for-college-funding-by-avoiding-the-kiddie-tax/
http://www.pselaw.com/2015/03/23/saving-taxes-while-paying-college-tuition/

The blog was in response to a letter about avoiding taxes when paying for college, so I might have expected a comment about savings bonds (Form 8815). Savings bonds grow tax-deferred; they're already exempt from state income taxes, and when are used for college expenses may be fed3erally exempt as well.