August 21, 2017

Tax Advantaged Ways to Help with College Tuition

Yale university buildings in winter after snow storm Linus

As the school year begins and tuition becomes due, family and friends may want to help students pay their education costs.  If you’re one of these generous people, you might be able to take advantage of the following gift tax strategies and/or tax credit opportunities.

Gift Tax Strategy

For 2017 the gift tax exclusion is $14,000, per donee.  This means, if you give an individual more than $14,000 in a given year, you must file Form 709 to report the gift and may also be subject to a gift tax.

Tuition payments made directly to a school:

If a grandparent decides to help a grandchild with tuition, the grandparent could make the payment directly to the school and not “gift” the cash to the grandchild.  These direct payments are considered qualified transfers, not subject to the gift tax rules or Form 709 reporting requirements, and apply to both full-time and part-time students.  It is important to note that only tuition and related fees currently qualify for this exclusion.  Payments for any other educational costs, such as room and board, books, or supplies, exceeding $14,000, must be reported on Form 709.

Qualified tuition programs:

A qualified tuition program (529 plan), can be a great way to contribute to a beneficiary’s future higher education expenses.  Contributions to these plans exceeding $14,000 are not eligible for the gift tax exclusion, and must be reported on Form 709; however, the contributor is able to make an election to spread these payments over five years.  This allows a donor who contributes $70,000 to a 529 plan in 2017 to save his/her lifetime gift tax exclusion by reporting only 20% as a gift in the current year, and each of the four years following.

Tax Credits

Education credits for tuition and other qualified educational payments may also be available to taxpayers; however, income and dependency rules apply.

If a parent pays tuition and qualified expenses for a student claimed as a dependent on his/her tax return, only the parent may claim the education credit.  If the parent does not claim the student as a dependent, only the student can claim the education credit.  This also applies to third-party payees.  A third-party payee would be anyone other than the taxpayer, his/her spouse, or claimed dependent.

If a third-party pays tuition and fees directly to an educational institution, the student is considered to have paid these qualified expenses.  For example, if a grandparent pays the tuition for a student and the student is not claimed a dependent of another taxpayer, the grandchild is eligible to take the education credit (subject to income limitations).  If the grandchild is claimed a dependent of another (parent/guardian), then only the taxpayer claiming the grandchild would be allowed to take the education credit (also subject to income limitations).

It is important to note that the two education credits currently available – the American Opportunity Credit and the Lifetime Learning Credit – each have their own set of stipulations, and cannot both be applied for the same student in the same year.

For additional information on the cost of college education or how distributions work on qualified tuition programs, see the links below from Horizon Advisors or contact Maddox Thomson & Associates for assistance: