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Tax benefit for grandparent paying grandchild's college tuition?


jelbe5
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Our oldest dd is attending our local community college.  She is taking two classes per semester right now.  Compared to tuition at local four year institutions the two year community college is a bargain.  She is also very happy there and has transitioned very nicely from our homeschool.

 

My parents have generously offered to help us by paying for her tuition themselves.  From what I am understanding, their gift would not be considered taxable income to my daughter if they make the payment directly to the college.  However, my parents are under the impression they will be able to deduct this gift from their taxes, which would benefit them.  I am not sure that is correct . . . I don't think they can do that unless my dd is their dependent.  I have done some quick research online but I am finding conflicting information.

 

Does anyone have experience with this?  Could anyone point me to the proper place on the IRS website where I could look things over myself?  I don't want to do anything improper.  Thanks.

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http://www.irs.gov/publications/p970/ch02.html#en_US_2012_publink1000204394

 

She would need to be claimed as a dependent on their taxes for it to be a deduction.

 

http://www.irs.gov/uac/Eight-Tips-to-Determine-if-Your-Gift-is-Taxable

Paying tuition or medical expenses directly to the institution is an exception to gift tax rules.

 

They can consult their CPA and get options for the most beneficial way to set this up for everyone. Maybe a trust or 529 plan...

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It is not tax deductible for them as she is not their dependent. Tuition paid on her behalf is considered a gift to her, however it is not taxable as income for her, nor is it subject to the gift tax, but only because it is tuition.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes

 

The grandparents can deduct the tuition only if they can claim her as a dependent. http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center

 

Disclaimer: I am not an accountant and I am not giving financial advice. They should consult an accountant or a tax attorney if they have questions about the code.

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