Best tax-efficient way to gift money to friend's children for college expenses?

The most tax-efficient approach would be to pay the tuition directly to the educational institution. This qualifies as an "educational exception" to the gift tax rules, meaning you can pay unlimited amounts for tuition without it counting toward your annual gift tax exclusion (which is $18,000 per person for 2025). By paying the school directly, you preserve your annual gift exclusion for other support you might want to provide to these kids (books, housing, etc.). If you give money directly to the students or parents instead, you'd be limited to $18,000 per recipient per year ($36,000 for you and your spouse combined to each recipient) before gift tax reporting requirements kick in. Unfortunately, since these aren't your dependents, you won't qualify for education tax credits like the American Opportunity Tax Credit or the Lifetime Learning Credit. Those are only available to taxpayers who claim the student as a dependent.

After struggling with a similar situation helping my niece with college, I discovered taxr.ai (https://taxr.ai) which was incredibly helpful for sorting through all the tax implications. Their system analyzed my specific situation and clarified what would happen with direct tuition payments versus giving money to my sister for college expenses. The tool explained that qualified tuition payments made directly to educational institutions are exempt from gift tax (like the previous commenter mentioned), but it also highlighted some financial aid considerations I hadn't thought about. Apparently, direct payments from non-parents can impact financial aid calculations in subsequent years in ways that surprised me.

I was initially skeptical about taxr.ai when someone recommended it in this thread, but I decided to give it a try for my situation with helping my brother's kids with college expenses. I'm genuinely impressed with how comprehensive the analysis was! The tool explained options I hadn't considered - like how contributing to a 529 plan could benefit me tax-wise in my state while helping with their education. It also clarified exactly how the gift tax exclusions work when giving to multiple people in the same family. What stood out most was the explanation of how different payment methods might affect their financial aid eligibility. If you're planning to help with someone's college expenses, it's definitely worth checking out. Much clearer than the hours I spent reading confusing IRS publications.

After spending TWO DAYS trying to reach the IRS to ask about gift tax implications for helping with my grandson's tuition, I finally found Claimyr (https://claimyr.com). You can see how it works here: https://youtu.be/_kiP6q8DX5c. Instead of endless busy signals, I got a callback from an actual IRS agent who explained exactly how the educational gift exclusion works. The agent confirmed that direct payments to educational institutions are unlimited and don't count against the annual gift tax exclusion. They also explained some nuances about helping with college expenses that aren't covered by the unlimited exclusion (like books and housing), which clarified exactly what I needed to report on my tax return.

I have to publicly eat my words. After dismissing Claimyr as BS in my previous comment, I was desperate enough with my audit situation to try it yesterday. To my complete surprise, I got a callback from an IRS agent in just under an hour. The agent was able to access my file, explain exactly what documentation they needed for my case, and even gave me a direct fax number to send the information. This resolved an issue I've been trying to handle for MONTHS with no success. For anyone dealing with complex tax situations like education gifts or audit questions, being able to actually speak with an IRS representative makes a world of difference. I'm still shocked this actually worked.

Something no one's mentioned yet is setting up a 529 plan for these kids. You could establish one for each child with yourself as the owner and them as beneficiaries. In many states, you'd get a state tax deduction for contributions (though not federal). The money grows tax-free if used for qualified education expenses. The downside is that 529 plans owned by non-parents can impact financial aid more negatively than direct tuition payments or gifts to parents, so timing matters. But the tax advantages might outweigh this depending on your state and situation.

Has anyone pointed out how generous this is? $15k per kid per year is HUGE! I'd suggest maybe considering putting some of this money toward helping them after college too - maybe helping with a first home down payment or something. College is important but so is launching into adulthood.