Education expenses and dependent status

[VlpRop76]

My Grandfather has money set aside to pay for both of my son's college education.  He will pay up to $50,000 per year per son.  He will be paying directly to the school.  Are there certain things he can't pay for and how will that affect our claiming our son as a dependent?

[RobertB4444]

Your Grandfather can pay for any expenses that he wants to.  He can't get a tax deduction for the tuition and fees unless he is claiming your children as a deduction, however.  Only the person claiming them as a dependent can claim the tax deduction.

As your children's custodial parent you are the person(s) authorized to take a tax deduction for your children for every year until they are 24 as long as they are full time students.  If you want your grandfather to be able to claim them as a deduction then you need to not claim them in any years that he is paying their tuition and expenses.

[Edited robertb1326 01/19/2022]

[Hal_Al · Accepted solution]

Q. Are there certain things he can't pay for?

A. Simple answer: No. At least for income taxes and dependent status purposes.  There are limits for purposes of gift tax return rules*. If the money Grandfather has set aside is in a 529 Plan, then there is no limit on school related expenses. 

Q. How will that affect our claiming our son as a dependent?

A. Not at all.  He can still be your dependent.  There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test. 

The support test is different for each type. The support test, for a QC, is only that the child didn't provide more than half his own support. The support test for a Qualifying Relative is that the taxpayer provided more than half the relative's support.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation.  So, since your son won't be providing his own support, the relative he lives with (you, his parents) can still claim him, even though Grandfather is providing most of his support. 
3. He lived with the parent (including temporary absences such as away at school) for more than half the year.

Because he is your dependent, you get to claim the tuition credit or deduction, not Grandfather.

*The tuition gift tax exclusion only applies to tuition payments. Money that is gifted to a child for other college expenses, such as books, supplies, room and board costs, do not qualify for the exclusion. 

[Opus 17]

@VlpRop76 

How old are your children now?

@Hal_Al 

Depending on the childrens’ ages, can you add anything about 529 plans?  I believe the grandfather could contribute to a 529 plan in the name of each child and receive certain tax benefits.  (These benefits would be for the grandfather, not the great-grandchildren.  If the grandfather doesn’t care about his own tax breaks, he can give any amount to anyone for any purpose.  Gifts over a certain amount must be reported and might be taxed, but that is a problem for the grandfather, not the grandchild or great-grandchildren.)

[Hal_Al]

I assumes the sons were close to college age, so it may be too late for much  potential tax free growth of investment money.  But if they are just entering college, there still some potential (3-4+ years)  tax free growth with the money in a 529 plan.  It's not too late to contribute to a 529.   529 plan contributions may get a limited state deduction, but there is no federal deduction.  The gift tax exception is only a little better.

There's numerous articles on the net. e.g. 

https://www.fidelity.com/learning-center/personal-finance/college-planning/abcs-of-college-savings-p...

https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan

[VlpRop76]

There are no 529 plans involved in this.

[VlpRop76]

There are no 529 plans involved.

[AmyC]

Then @Hal_Al has you covered. See also:

• Publication 501 - Internal Revenue Service page 10 to verify that you qualify to claim the dependent each year.
• Publication 970, Tax Benefits for Education. -includes 529 information. Your state may have another option.