Tuition paid by Grandma

[Kram BergGold]

When grandma pays $40,000 to the college, for a 19 year old grandchild's tuition, room and board, this is a non reportable gift for gift taxes. Am I correct that for income taxes we treat this gift as money the child used for her support, therefore the child claims herself as an exemption because she provided more than 50% of her own support. This is a 2007 issue so there are no issues with Kiddie Tax.

[travis bickle]

Maybe not

When grandma pays $40,000 to the college, for a 19 year old grandchild's tuition, room and board, this is a non reportable gift for gift taxes. Am I correct that for income taxes we treat this gift as money the child used for her support, therefore the child claims herself as an exemption because she provided more than 50% of her own support. This is a 2007 issue so there are no issues with Kiddie Tax.

Here is a quote from IRS Pub 970:

Note. Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. [Emphasis ADDED].

Notice that in the above quote, the IRS is saying "dependent" not "student". This implies to me that the college student must have passed the tests to be considered my dependent. [Did that come out in English? I am awfully tired].

The way I read the IRS quote above is:
(1) without considering ANY educational funding, does the little darling qualify as my dependent?
(2) if so, then the money paid by Grandma was - for tax purposes - paid by me.

This, in the case you cite, I would have provided ($XXXXX.XX + $40,000.00) in support of the dependent in question. This would seem to me to be an insurmountable amount for a "normal" college student to surpass out of their own pocket.

You, however, know better than I that each case must be examined dollar by dollar before arriving at a conclusion.

[dtlee]

While I agree that th above wordng is used in Publication 970 for the Hope and Lifetime Credits, the wording is very different when looking at the Tuition and Fees Deduction (Adjustment). For that they say:

Expenses paid by others.

Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim, or can claim, an exemption on your tax return for the student, you are not considered to have paid the expenses and you cannot deduct them. If the student is not a dependent, only the student can deduct payments made directly to the institution for his or her expenses. If the student is your dependent, no one can deduct the payments.

Example. In 2007, Ms. Baker makes a payment directly to an eligible educational institution for her grandson Dan's qualified education expenses. For purposes of deducting tuition and fees, Dan is treated as receiving the money as a gift from his grandmother and, in turn, paying his own qualified education expenses. If an exemption cannot be claimed for Dan on anyone else's tax return, only Dan can claim a tuition and fees deduction for his grandmother's payment. If someone else can claim an exemption for Dan, no one will be allowed a deduction for Ms. Baker's payment.

I believe that for consistency purposes, such payments are always considered to be a gift to the student. The student is considered to have paid for the fees with the gifts and, for the purpose of the credits only, the parents are considered to have paid for any expenses which are paid for by the student or considered paid for by the student if the parents are claiming the child.

In other words, my interpretation is that for the credits, only if the parents are able to otherwise claim the child, can they consider themselves to have paid the expenses which were paid by others on behalf of the child. If they cannot claim the child, the child is considered to have paid for the expenses out of their own funds. For the Tuition and Fees deduction, the child is always considered to have paid the expenses paid by others.

So for the initial question, I agree that these funds paid directly to the school by others should be considered to be paid for by the student for support purposes.

Of course, I have never seen anything stated that clearly about this.

[travis bickle]

I agree

In other words, my interpretation is that for the credits, only if the parents are able to otherwise claim the child, can they consider themselves to have paid the expenses which were paid by others on behalf of the child. If they cannot claim the child, the child is considered to have paid for the expenses out of their own funds. For the Tuition and Fees deduction, the child is always considered to have paid the expenses paid by others.

and am sorry that I did not include "concerning the Hope/Lifetirme Learning Credits" in my original post [if you revisit that post, you will see where I said I was typing while tired, my apologies].

I believe your interpretation to be completely correct. But if this were my client, with the available facts, I think I would claim the child and one of the education credits [provided I am able to otherwise claim the child as my dependent -- as stated in my original post]. Otherwise I would be telling my client to forego the child's dependency exemption and any/all educational credits for no benefit that I can see since the child PROBABLY does not have any significant tax liability.

If I do this, am I "bending" the rules? I do not believe so, since the service itself says that a third party can pay the educational costs while still allowing me to claim the educational credit on my return. That being so, how could I be doing wrong?

I think what is more important is to have Mom/Dad sit down with Grandma/Grandpa and the tax planner and figure out who will pay what, and how, in the future.