Billionaire Robert F. Smith, the founder, chairman and CEO of a private equity firm Vista Equity Partners, promised to pay off the school loans of the entire 2019 graduating class of Morehouse College in his commencement speech on May 19. Morehouse College is a historically all-male liberal arts college located in Atlanta, Georgia. The first question that comes to an accountant’s mind is what are the tax consequences of this incredibly generous gesture.
Although the specific details of how the elimination of the student loans will take place are currently unknown, there are two possible scenarios. In the first one, the payment will be considered taxable as a prize and students would have to recognize it on their individual income tax returns. For example, if Mr. Smith gives money directly to school or the loan institution and then the debt is forgiven from that institution or the school.
The second, more likely outcome is that the payments would be considered gifts, in which case the students would have no tax burden, and any tax to be paid would be the responsibility of Mr. Smith. In 2018, annual exclusion from tax (per person receiving a gift) was $15,000. As the collective loan total nears $40 million, it would be best for Mr. Smith to figure out a way to pay off all the loans individually over several years rather than all at once to avoid paying gift tax.
In either scenario, this announcement by Mr. Smith gave graduates encouragement, motivation and a chance to focus on pursuing their dreams without the heavy burden of student loans.
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