For the nearly 400 graduates of Morehouse College in Atlanta, Billionaire Robert F. Smith was an inspirational commencement speaker. His inspiration went to the next level, when he told nearly 400 graduates of the historically black, all-male Morehouse College in Atlanta that he could pay off their student loans. He wanted to free them from the burden of student loan debt—estimated at $40 million—and expressed his wishes that they would continue the tradition and pay it forward.
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.” This means typically 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 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.
Student loan debt has been blamed for a generation being unable to purchase homes, start families and pursue their dreams. In 2018, research shows that student loan debt has reached $1.5 trillion, second only to the amount of mortgage debt held by Americans. Let’s hope that Smith has started a trend of billionaires helping college graduates with their student loans.
Reference: Fox Business (May 20, 2019) “Will the IRS tax Robert F. Smith's gift to Morehouse grads?”