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?
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
limiton
schoolrelated
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:
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.
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]
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
limiton
schoolrelated
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:
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.
How old are your children now?
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.)
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.savingforcollege.com/intro-to-529s/what-is-a-529-plan
Then @Hal_Al has you covered. See also: