Gift Tax and College Loans

[Ognak1]

Hello,

I'm helping pay college tuition for my NON-DEPENDANT 19 year old daughter. I have three questions regarding this.

1. My tuition payments can be considered a Gift Tax, correct?

2. On her tuition loan, I am a co-signer. Can this be written off as a deduction even though my name isn't first on the Contract?

3. Can paying her rent/books/food also fall under a deduction of some sort because she is attending school out of state?

Any other tips/information would be appreciated!

[xmasbaby0]

You do not say why you are not claiming your 19 year old as a dependent.   Is the other parent claiming her?

No, the tuition you are paying is not deductible if you are not claiming her as a dependent.   You cannot get an education credit if you are not claiming her as your dependent.

No you do not claim the tuition as a gift.   A gift would not be deductible  for you nor would it be taxable for her.

If you co-signed the student loan and you made the payments you can deduct the interest you paid on the student loan.

Rent and food are living expenses.   Living expenses are not deductible, nor are they qualified education expenses, so, no, you cannot deduct anything for paying for rent or food.  Books are education expenses but you cannot claim anything for them since she is not your dependent.

[Hal_Al]

Q. My tuition payments can be considered a Gift, for Gift Tax purposes, correct?

A.  No. Tuition payments made directly to a college, are not subject to gift tax, even if the student is not your dependent.  Reference: https://www.savingforcollege.com/article/tuition-gift-tax-exclusion#:~:text=Tuition%20payments%20mad....

Q. On her tuition loan, I am a co-signer. Can this be written off as a deduction even though my name isn't first on the Contract?

A. No. Loans, themselves, cannot be "written off", regardless of who's name it's in.  What the money is spent on may qualify for an education credit or deduction.  You may deduct any interest paid (since you are co-signer, regardless of order on the documents), but only if the student was/is your dependent at the time the money was spent on education. 

Q. Can paying her rent/books/food also fall under a deduction of some sort because she is attending school out of state?

A. Only if she is your dependent.

As the other reply also indicated, the better question is: is she still your dependent?  The answer is: yes, most likely.  You co-signing the loan means that the loan is considered support from you and not self support by the student.  You "paying her rent/books/food" is also support by you and not self support by the student. Almost all unmarried 19 year olds, even going to school out of state, are dependents of their parent(s).

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.

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

1. He/she 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
3. He lived with the parent (including temporary absences such as away at school even living off campus), for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,400), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.  TT will check that box on form 1040.

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

[Ognak1]

Hello

I appreciate your thorough answers.

Over the years I didn't claim my daughter as a Dependent because she lived with her mother primarily.

Now that our Daughter is in her own apartment attending college, her mother and I are splitting all costs down the middle (Tuition, rent, food, etc). How can we claim her on taxes in this scenario?

[Ognak1]

Thanks for replying. 

"You do not say why you are not claiming your 19 year old as a dependent.   Is the other parent claiming her?"

             Yes. I supported my daughter but she lived

             primarily with her mother until now. We both just started paying her rent, tuition, food, etc equally this month. 

         Now that this is the case, how do we both claim her as our dependant?

[DoninGA]

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@Ognak1 wrote:

Thanks for replying. 

"You do not say why you are not claiming your 19 year old as a dependent.   Is the other parent claiming her?"

             Yes. I supported my daughter but she lived

             primarily with her mother until now. We both just started paying her rent, tuition, food, etc equally this month. 

         Now that this is the case, how do we both claim her as our dependant?

---

No, you both cannot claim her as a dependent.  The tax code does not allow that.

Assuming that she is under the age of 24 and is a full time student -

If she would normally be living with her mother when not is school and she has lived in her mother's home for more than 6 months in the year, then only her mother can claim her as a dependent.  

[Ognak1]

Ok, can her mother and I take turns claiming her as a dependent?

Also, can I claim the tuition deduction even though she isn't my dependent?

LOL...I'm just trying to find any tax credits I can in this scenario. I am giving my daughter approximately $1000 a month in support of her going to school. 

[xmasbaby0]

As already stated---you cannot get any sort of education credit or deduction unless you are claiming her as your dependent.   Only the parent who claims her as a dependent can do that.   As far as "taking turns" claiming her---the custodial parent is the one who has the right to claim her.    If she has been living with her mom, then her mom is/has been  the custodial parent.   Since she is too old for the child tax credit, the CTC does not come into play now, even if you had a signed agreement with your ex-spouse.    

Sorry--- there are not any deductions/credits despite the money you are spending to help your daughter attend college since you are not able to claim her as a dependent.

[macuser_22]

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@Ognak1 wrote:

Ok, can her mother and I take turns claiming her as a dependent?

Also, can I claim the tuition deduction even though she isn't my dependent?

LOL...I'm just trying to find any tax credits I can in this scenario. I am giving my daughter approximately $1000 a month in support of her going to school. 

---

Actually the rules for claiming a 19 year old are different.  Only the parent that paid more than half of her total support for the year can claim.    Living with the parent is immaterial for an adult dependent.  See the IRS link below for the support rules and worksheet.  Her total gross income must be below the limits.

---Tests to be a Qualifying Relative (& Unrelated Persons)---
(Must meet ALL of these tests to be a dependent)

1. The person cannot be your qualifying child or the qualifying child of any other taxpayer.

2. The person either must be related to you, or must live with you all year (all 365 days as a member of your household - There are exceptions for temporary absences such as school, illness, business, vacation, military service).

3. The person's gross income for the year must be less than $4,300 (tax-exempt income, such as certain social security benefits, is not included in gross income)

4. You must provide more than half of the person's total support** for the year.

5. The person is not filing a joint return.

In any case, the person must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico

The above is simplified; see IRS Publication 501 for full information.
https://www.irs.gov/pub/irs-pdf/p501.pdf

** Pub 501 Worksheet 2 for determining support
https://www.irs.gov/publications/p501#en_US_2020_publink1000292527

[Ognak1]

I believe you.

Am I misunderstanding the following Article? 

Whose Tuition Can You Pay to Qualify for Educational Exclusion?

You can qualify for the federal gift tax educational exclusion simply by paying for any student’s tuition. You may cover any student’s tuition, whether he or she is studying full-time or part-time. He or she can also attend a variety of educational institutions, from elementary schools to universities. You might pay for the tuition of your child, your grandchild, a sibling, a student you’re mentoring, or someone else whose education you care about. The choice is yours!

Gifting tuition is a great way to ease the financial burden of someone you love while reducing your annual tax burden. Exclusion gift limits may increase over time, so make sure you’re aware of your eligible claims each year. Don’t overlook opportunities to further a loved one’s education through the gift tax education exclusion.

[macuser_22]

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@Ognak1 wrote:

I believe you.

Am I misunderstanding the following Article? 

Whose Tuition Can You Pay to Qualify for Educational Exclusion?

You can qualify for the federal gift tax educational exclusion simply by paying for any student’s tuition. You may cover any student’s tuition, whether he or she is studying full-time or part-time. He or she can also attend a variety of educational institutions, from elementary schools to universities. You might pay for the tuition of your child, your grandchild, a sibling, a student you’re mentoring, or someone else whose education you care about. The choice is yours!

Gifting tuition is a great way to ease the financial burden of someone you love while reducing your annual tax burden. Exclusion gift limits may increase over time, so make sure you’re aware of your eligible claims each year. Don’t overlook opportunities to further a loved one’s education through the gift tax education exclusion.

---

No.  The article is correct (although very misleading  since it does not apply until you have given $11.4 million in gifts), but you are confusing "gift tax" with the income tax deduction - apples and oranges - totally different things.

I don't know what "article" you are referring to, but "gift tax exclusion" has nothing to do with income tax deductions.   Gift tax is reported on form 709 if it exceeds $15,000 in a tax year to any one person and is not an actual tax until you exceed the $11.4 million lifetime limit but must be reported on form 709 if more than $15K.

Gifts given for tuition are not subject to that gift tax.

[macuser_22]

If you received an mail reply then the above reply has been edited to add information.

[xmasbaby0]

@Ognak1 We have no source reference for that article you are citing so we do not know how old it is or where you got it, but you are misinterpreting what it says about gifts for education.   There is no sort of income tax deduction you can get for giving your daughter a "gift" for her tuition or for her living expenses at school.  

For further information on "gift tax":

GIFTS

Money that you receive as a gift is not taxable income to you, and you do not need to report it on your income tax return.  Money that you gave as a gift to someone else is not deductible for your taxes.

Turbo Tax does not support the gift tax form 709, but here is a link:

https://www.irs.gov/pub/irs-pdf/f709.pdf

https://turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/L5tGWVC8N

https://www.forbes.com/sites/ashleaebeling/2017/10/19/irs-announces-2018-estate-and-gift-tax-limits-...

[Opus 17]

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@Ognak1 wrote:

Ok, can her mother and I take turns claiming her as a dependent?

Also, can I claim the tuition deduction even though she isn't my dependent?

LOL...I'm just trying to find any tax credits I can in this scenario. I am giving my daughter approximately $1000 a month in support of her going to school. 

---

Let's take a step back.

Under the "special rules for children of divorced or separated parents," a child is not considered to live with either parent once they are of legal age (18 in most states).  That means that the "qualifying child" type of dependent is disallowed, since that requires the child to live with one of the parents.  Only the "qualifying relative" type of dependent is allowed.  To claim a child as a qualifying relative dependent, the parent must pay "more than half" the child's support.  Remember that money the student earns in their own name, as well as student loans in the student's name, count as support the student provides themself.  So you may find that even if you pay 45% of the student's support and the other parent pays 45%, then the student provides 10% of their own support.  In that case, no one can claim the child as a dependent because no one paid more than half.**

So going back to your original questions.

1. You can give someone up to $15,000 per year for any reason.  If you give more than $15,000, you must report the gift to the IRS on a form 709 Gift Tax Return.  No tax is actually owed unless your lifetime gifts to all people are more than $11 million, but the IRS uses form 709 to keep track of your gifts.  Form 709 is due the same time as your regular tax return (April 15) but is a separate form and is not part of your regular tax return. Turbotax does not include this form.

2. You can only deduct student loan interest if you are the borrower, or the borrower was your dependent when the loan was made.  (You also have to actually be the person who pays the interest.)  Because she probably can't be your dependent, you can't deduct loan interest even if you paid it and you are a co-signer.   However, if you do make loan payments, your child can deduct the interest you paid as if she paid it directly.  This is not normally true of loan interest but is a special rule for student loans.   (Since student loans don't generally go into repayment until the student graduates, there's probably nothing to deduct now anyway.  The existence of a loan is not deductible, just interest paid.)

3. You don't gain a tax benefit for educational expenses you pay for, because she isn't your dependent.  She can include books and other expenses you paid for on her tax return as if she paid for them.

**There is a rule that if no one pays more than half, everyone who pays more than 10% of the person's support could sign a multiple support agreement in which they agree on which person (who paid more than 10%) can claim the dependent.  To claim her as a dependent you would need her signature and the other parent's signature on a multiple support agreement.   However, the child's tax benefit and financial aid benefit to being independent is probably much larger than your benefit to claim her as a dependent.  Having your child be able to legally answer "no one can claim me as a dependent" on her tax return will probably result in the largest overall financial benefit to her and your family. 

[Ognak1]

Thanks for taking the time to write all of that. That helps me understand tremendously. 

Lawrence