Tax Benefit for Paying Grandchild's Tuition?

chisueAugust 15, 2011

I know I should pore over the IRS webpage, but...I bet someone here already knows the answer.

If I pay my grandson's tuition direct to the college, is it a tax advantage to either of us -- or would he have to be my dependent? (He's not.)

Perhaps all I can do is GIVE him $13K a year (tax free to me).

Grandma Sue

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Funds paid for anothers tuition or medical expenses, if paid directly to the institution or provider, are exempt from gift taxes and is not included in the $13,000 annual exclusion. Meaning you can pay the tuition and give the $13,000 (or $26,000 if your husband joins in the gift) as well if you so desire. Just be sure that you pay the institution direct.

    Bookmark   August 15, 2011 at 2:56PM
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You aren't going to run into any tax problems either way if you are talking about 13k.

However, if your grandson is getting any scholarships or need based assistance/loans, you should check the rules of those programs.

    Bookmark   August 15, 2011 at 3:13PM
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"Perhaps all I can do is GIVE him $13K a year (tax free to me)."

And no taxes on the recipient, either. That's why it's called a gift. '-)

You're a wonderful grandmother!

    Bookmark   August 15, 2011 at 3:56PM
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I'm still confused.

I'm being told that there's no benefit to paying his tuition (direct to the college) -- that it doesn't enter the picture *because he is not my dependent*.

I know I can give him a check for $13K. (Didn't realize that was tax-free to him. I'd assumed it was 'income' for him -- but wasn't concerned since his income is so low.)

So, to rephrase...

Can I pay a non-dependent's college tuition directly to the institution without the IRS deeming it a GIFT -- per my taxes or per his? Maybe there IS no benefit, except knowing where the money goes! lol

Let's say the tuition is $20K. Can I pay that to the institution for my non-dependent's tuition AND give him $13K?

    Bookmark   August 15, 2011 at 6:02PM
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Yes, so long as you pay the tuition, be it $20,000 or $50,000 directly to the institution it is not a taxable gift and doesn't apply against the annual exclusion for gift tax purposes -- i.e. $13,000. Which means that if you pay $20,000 to the college directly and give $13,000 to him, you don't have a taxable gift. If however you pay the entire $33,000 directly to him you do have a taxable gift of $20,000. The key is that the payment has to be directly to the institution. Of course, you can't deduct it either, but neither is it income to him. Check with your accountant or attorney, but this is an extremely common estate planning tool.

Here is a link that might be useful: IRS Publication 950

    Bookmark   August 15, 2011 at 7:07PM
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"taxable gift" is a bit misleading here. The lifetime gift tax exclusion is currently $5 million. You can give that much away and pay no taxes - either you or the recipient.

If you give the money directly to the school, it doesn't even count against that $5 million limit. Unless you are vary wealthy, you really never have to worry about paying federal gift tax.

    Bookmark   August 15, 2011 at 7:56PM
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True, but unless excluded as in the tuition, medical expenses, or the 13,000 annual exclusion, it must be reported. Even though the lifetime exemption is the same for estate and gift taxes are the same (at present) whether something passes by gift or inheritance makes a huge difference in basis. With an inheritance, there is a step up in basis, not so with a gift. Of course with cash it doesn't matter but with appreciated assets the difference could be huge. It is always best to consult a tax professional who is fully aware of your and your spouses financial status. And be mindful that we don't even know what the law will be on estates after 12/31/12.

    Bookmark   August 15, 2011 at 9:13PM
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The bottomline is that giving more than #13,000 per year as a gift to anyone does not trigger taxes for either party. It just has to be reported to the IRS if it exceeds that amount so that it can be deducted from the maximum that can be given to that individual in his/her lifetime by you. So, unless you are planning to give millions of dollars to this kid over his lifetime, it's a non-issue.

    Bookmark   August 15, 2011 at 11:00PM
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But there is also no tax-deduction benefit to you, tax-wise, since he is not your dependent. Even if he were a dependent, it would not be itemizable.

But you're a wonderful grandmother!

    Bookmark   August 15, 2011 at 11:12PM
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You're very generous but be very careful before you give your grandson this gift. The IRS isn't the issue here, as others have noted above. The issue is that if your grandson is currently receiving any need-based aid due to his having filed a FAFSA form, that aid could be cut next year.

FAFSA is the standard form for capturing a family's financial information to determine if the student is eligible for any Federal financial aid. Many colleges also use this form to determine eligibility for state and college-specific aid.

The year following your gift, your grandson will file FAFSA and will need to report your gift as "student nontax income". Student income is assessed at a rate of 50% on FAFSA. In other words, 50% of a student's income counts towards the family's expected family contribution (EFC).

For example, if you give $20,000 to the student one year, then the following year the student's EFC will increase by $10,000. If the student had previously received $10,000 in need-based aid from his college, then that will go away the following year because the "need" has been reduced.

If your grandson is not currently receiving any need-based aid or doesn't file FAFSA, then you don't need to worry. But if he does, then you need to structure your gift so that it doesn't affect his aid. One option would be to give him a loan of the amount of the gift, with a defined interest rate and payment schedule. Then forgive the loan when he graduates (be sure to include this loan forgiveness in your estate plan).

Here is a link that might be useful: Financial aid information

    Bookmark   August 16, 2011 at 10:43AM
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THANKS to you all!

I *think* I see why it is a good idea to pay the tuition. It's neutral for immediate taxes, but it gets $20K out of an estate. Who knows how long an estate can shelter $3M? It was only $1M not many years back. This lets me get an additional $20K out of an estate.

Thanks to everyone's contributions, I understand this part. (Annkathryn -- There's no financial aid involved. *I* am the financial AIDE. lol)

Are you all up for one more complication? Hope so.

In addition to my DH's and my personal trusts, there is a complex trust from which I, as trustee, can distribute. If I don't distribute to others, income from the trust comes to me -- taxable income.

Do the rules about gifts also apply to the trust? For annual taxes? For estate tax purposes? Same/Same?

If the trust pays tuition is it the same tax 'freebie' or would it be deemed a distribution (taxable)?

If the trust gives Grandson $13K, can it be deemed a gift (non-taxable) or is it a distribution (taxable)?

I'd like to avoid accepting income from the trust, paying income tax on it, then paying tuition/$13K gifts from personal funds.

BTW, I do have an accountant. It was he who said there was no tax advantage in paying our grandson's tuition *because he's not a dependent*. I think he was thinking too narrowly: That I couldn't take a deduction for it.

Thanks for letting me 'tax' your brains!

    Bookmark   August 16, 2011 at 12:28PM
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Glad there aren't any other financial aid implications, and you can just focus on how best to support your grandson (he's a fortunate kid!)

The Federal estate tax exemption reverts back to $1 million (from its current $5 million) in 2013, assuming no further action by Congress.

    Bookmark   August 16, 2011 at 2:22PM
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As for the trust, the answer is probably ok. At least as to the type of trust i woukd believe it seems to be. However you mentioned that it was "complex" which means that it could have some twists with which I'm not familiar. But for the standard grantor created revocable trust most commonly used for estate planning purposes and to avoid probate it would probably be fine. This is a common practice. But a quick call to the attorney who drafted the trust would be the wisest idea. And, yes bill, there are a number of folks that do have concerns about going over the unified credit. This concern would in rease greatly if the uniform exclusion reverts to 1,000,000 at the end of next year or even if the exclusion ends up being reduced to someplace in between due to new legislation.

    Bookmark   August 16, 2011 at 2:40PM
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"And, yes bill, there are a number of folks that do have concerns about going over the unified credit. "

I guess that depends on how you define "a number of folks" and your level of estate planning. If you start giving annual chunks of 13k to children and grandchildren plus paying for college etc, it is quite easy to pass large sums of money out of the estate with no tax implications. In fact, in the last year we had an estate tax, only 14,700 people actually had to pay it out of the millions that died that year. For most of them, the reason was poor planning, not that they just had incredible amounts of money. Obviously, congress can raise that limit and have even fewer people impacted, but I certainly wouldn't recommend anyone sitting around and waiting on government action.

BTW - while your grandson is in college, if you intend to help with a house down payment, start gifting the money early. Lenders are having a much longer look-back period now and recent gifts are suspect.

For the trusts, you can make all sorts of complicated trusts, so you really need to ask the lawyer who crafted it if you aren't sure of the implications. The costs of guessing wrong a pretty huge, so it will be very worthwhile phone call to verify.

    Bookmark   August 16, 2011 at 3:20PM
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You might also want to discuss with the college if you can prepay several years' worth of tuition, and if there is any advantage to you in doing so.

I agree, you are a VERY nice grandmother!

    Bookmark   August 24, 2011 at 1:09PM
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Oh, I'm not so nice! I would just like to put the money to good use now, while I can see the results!

I think this will be pay-as-we-go. I learned a lesson when we paid a full year's tuition for our DS to attend a private school, reasoning he'd feel more 'committed' if we went 'all in'. No refunds for tuition (or school jacket) when he left mid-year.

    Bookmark   August 25, 2011 at 1:01PM
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"Oh, I'm not so nice! I would just like to put the money to good use now, while I can see the results! "

Give yourself a bit more credit than that. For this type of money, you could be calling to check up on him from your vacation home in the caribbean! This is a very generous gift we are talking about.

    Bookmark   August 25, 2011 at 2:03PM
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billl -- It's under $20K. Not exactly 'Ivy League expensive'. I don't want a home in the Caribbean anyway. Have a little condo on Maui -- quite enough to manage. lol

I hope Congress does lower the estate tax exclusion. FIVE MILLION dollars? Gee, I wonder why we're in the red.

    Bookmark   August 25, 2011 at 2:16PM
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