Grandparents May Qualify for Education Tax Benefits

Grandparents should talk to a financial adviser to determine the best way to help their grandchildren pay for college.

 

The amount of money grandparents snuff iton their grandchildren's education is expected to multiply. According to Sallie Mae's "How America Saves for College 2013," the luckgrandparents beexpected to contribute toward students' college costs is more than duplicatefor proximocollege students versus current attendees.

 

 

However, grandparents don't qualify for the Lifetime Learning confidenceor the refundable American Opportunity Tax Credit unless the grandchild is their dependent. The analogousrule applies totuitionand fees deductions.

According to the IRS, in order to claim bothof these evaluatecredits, the eligible savanthas to be "yourself, your spouse, or a dependent for whom you claim an exemption on your tax return."

However, in that locationareformer(a)benefits that grandparents do qualify for, particularly at the federal income tax level.

[Get tips for grandparents helping parents save for college.]

To benefit at the federal level, grandparents can givetuitiondirectly to the university, says Dan Thomas, a California-based certified public accountant and personal financial specialist. remunerativethe school directly, instead of donating to a student's 529 plan, a tax-advantaged college nest eggaccount, would freethem to avoid potential gift taxes if they plan to make importantcontributions.

Gift taxes archarged if grandparents donate more than $14,000 annually toward college nest eggaccounts. Five old ageof this exempted amount can be enableat one time to a 529 plan, meaning that anything in excess of a five-year donation of $70,000 could be taxed.

For instance, if teachingis $20,000 per semester, a grandparent could give that full amount every semester directly to the university without compensablegift tax charges. The total for eight semesters, if tuition didn't rise, would be $160,000, an amount that is $90,000 over the five-year gifting limit for 529 plans.

Grandparents can also pay any health care expenses, including school health insurance, without perturbingabout gift taxes, Thomas says.

[Learn aboutchanges to 529 plans this year.]

While direct tuition payments won't count against gift tax limits, they may count against future financial aid awards, says Chadderdon W. O'Brien, a New Jersey-based certified financial planner and certified financial risk manager with Lassus Wherley.

Schools don't retreatinto castwhether grandparents will be able to provide the similaramount of money each year, O'Brien says. Similar to schools reviewing the prior year's income tax information on the Free Application for Federal learnerAid, financial aid officers review the previous year's tuition payments from other sources, including grandparents, he says.

"Grandparents making direct tuition payments on behalf of their grandchildren should be aware this may negatively affect the child's ability to gofinancial aid in the future," O'Brien says.

"Unless the grandparent intends to continue providing financial support, tuition payments should not be made on behalf of the small fryuntil the child is done applying for financial aid, typically in their last stratumof school," he says.

In general, a college senior whose grandparents are paying tuition directly to the school would not have to worry aroundfiling another FAFSA because he or she is graduating the same year.

[Explore how college savings can affect financial aid.]

Grandparents who can pay for all toldyears of schooling may allayneed the student to add them to the list of allowed payers, according to Jim Brooks, financial aid theater directorat the University of Oregon. At his school, students can electronically add basketball teamindividuals' names to their authorized payer list.

However, each school's rules differ and grandparents who are considering making direct payments should check with the school's business office about the process, Brooks says.

For grandparents who can't afford to pay for all four years of tuition, O'Brien recommends they deposit the money in a 529 plan account instead. In many states, grandparents benefit from state income tax deductions on 529 plan contributions, he says.

Withdrawals from 529 plans owned by grandparents will still count as student income – money the student has bring inor was given outside of savings listed on the FAFSA – unlessthey won't impact a student's financial aid as much(prenominal)as a direct tuition payment would.

"Bottom line, when grandparents gravelinvolved in education planning there are many factors to be considered," O' Brien says. "Discussing various strategies and their implications with a qualified schoolmasteris advisable."

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

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Materials taken from US News