Colleges own tuition prepayment plan

My daughter will be a freshman next year at a private university.

They have a plan where I can prepay up to 8 semesters at the current tuition if I pay by July 1. This isn't a 529, or anything like that, it's just a prepayment. If for whatever reason she withdraws or transfers, they just refund the unused amount in full.

The college does not report anything to the IRS except what they bill each semester.

I have questions about the tax implications. Are there any? There do not appear to be to me.

Tuition inflation has been running about 4% per year, so this seems like the unused balance will effectively return 4% tax-free per year if my daughter does go the expected 4 years in the sense that I would have otherwise had to pay the higher tuition.

Any thoughts?

Reply to
jms2l
Loading thread data ...

if I pay by July 1. This isn't a 529, or anything like that, it's just a prepayment. If for whatever reason she withdraws or transfers, they just refund the unused amount in full.

You can claim tax benefits only on the return for the year in which you make the payment. Depending on your income you could be leaving a lot of tax benefit on the table if you paid the maximum in one year.

See Publication 970 for the education-related tax benefits. The American Opportunity Credit is the most generous for undergraduate expenses, but you need to consider your income and tax without the credit.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

To me it sounds like a deposit, and no tuition deduction or credits would be allowed on that payment alone, but based on the tuition paid from that deposit in each of the years it was withdrawn by the school.

Reply to
paulthomascpa

I agree completely with Paul. Qualified expense occurs when the school debits the account.

Reply to
Alan

To add: payments of tuition made in 2012 for an acedemic period (term, semester, quarter, ...) starting not later than March 31, 2013 may be used for QEE - qualified educational expense. Tuition payments in 2012 for academic periods beginning after March 31,

2013 are not QEE.
Reply to
Arthur Kamlet

I agree. I sailed past the refundable part.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

So is your opinion that it negates the education credits in later years. I'm confused by your post.

Reply to
jms2l

Sorry, but I do not know how to clear your confusion. Paying tuition etc in advance cannot benefit you if it's more than three months into the next year in advance.

Reply to
Arthur Kamlet

That was my initial reaction, but then someone raised the issue that this is more of a deposit than a prepayment. If the student's plans change the entire unused balance is refunded. That was enough for me to switch over to the side that says it's not paid until the institution charges the account, which would allow tax benefits in later years.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

more of a deposit than a prepayment. If the student's plans change the entire unused balance is refunded. That was enough for me to switch over to the side that says it's not paid until the institution charges the account, which would allow tax benefits in later years.

That's right. The school said that they send out a 1098-T each year for the amount that they withdraw from the "account". Is there any reason these aren't QEE or that I can't still get use the tax credits?

I was more concerned that when they do deduct from the account the difference between the actual future tuition that they charge everybody else, and what gets deducted from my account would be considered income to me. Would the reason that it wouldn't be income because it's a rebate?

Reply to
jms2l

I have re-read Pub 970. e-read the definition of Qualifying Education Expenses, and found nothing about deposits and the redemption of deposits.

To repeat: QEE paid in advance for a term, semester, quarter, etc that begins not later than March 31 of the year following payment are permitted. But not via this "deposit" route.

Reply to
Arthur Kamlet

You have missed the point. The taxpayer is not prepaying qualified education expense. The taxpayer has contracted with the school to deposit into his child's account funds to be used for future qualified educational expense. As the school requires payment they debit the account for tuition and fees for the applicable semester. At the time of the debit, the taxpayer has incurred qualified educational expense.

Reply to
Alan

So does this method work for payments to doctors? To charities? To the county property tax office?

How do you prove you paid the amount in the indicated year?

Reply to
Arthur Kamlet

Possibly. You can prepay for a future service and deduct it when the service is performed.

To charities? I'm not aware of any charity that accepts deposits.

To

You can always make a payment, but it won't be deductible until such time that you are assessed.

The student's account and/or the 1098-T if the school uses Box 1.

Reply to
Alan

Buying something (tuition) at a discount isn't income (unless you sell it for full price).

Seth

Reply to
Seth

I'm not aware of any of those that accept _refundable_ deposits for future payments. (And especially not that fix the price at the time the deposit is made, the only reason to make the deposit to them and not to someone who pays interest.)

Seth

Reply to
Seth

: >I was more concerned that when they do deduct from the account the : >difference between the actual future tuition that they charge : >everybody else, and what gets deducted from my account would be : >considered income to me. Would the reason that it wouldn't be income : >because it's a rebate?

: Buying something (tuition) at a discount isn't income (unless you sell : it for full price).

: Seth

I don't know if this has any tax consequences, but I see it as a loan to the collegs that pays no interest, but does pay by allowing you to use the loan over time to pay tuitin for the original price, a kind of interest payment not set in advance.

Wendy Baker

Reply to
W. Baker

It's a refundable purchase, not a loan.

Consider: in December, I bought a refundable airline ticket for $500 for flights in February. The following year, the price had increased to $700. I used the ticket. I don't see where there's any kind of loan or interest involved, it's just an advance purchase.

Seth

Reply to
Seth

Original poster here with in interesting followup question.

So we did indeed prepay 4 years of tuition. There was no reporting of any of this since payment of tuition to a school is not a taxable event.

The 1098-T we received for 2014 indicates just the amount used from the account for Fall 2014 and Spring 2015, we still have two years of tuition on account.

We also have a 529 plan earning 2.64% for fees, room, board and books.

Since my daughter lives in school owned sorority house, the bursar only bills fees and room. Board is a separate billing.

In December, we had the 529 plan send a check to the school for more than they bill to reimburse us for 2014 board and books. This generated a 1099-Q in the student's name. The school is sending us a refund of the overage in 2015 (they don't process refunds until 2 weeks into the spring term). Since I can document that the qualified expenses are less than the 1099-Q, I don't think this refund is a taxable event, but I'm not sure.

The interest rate on the 529 plan 2.64% is better than I could get on any decent fixed income investment. Tuition inflation was 3% last year.

The benefit of the prepayment was to get a discounted tuition. However, would I run afoul of the IRS if I deposited an additional two years of tuition into the 529 plan and disbursed them to the school and got reimbursed for the overage from the school?

This would seem to allow me to earn an additional 2.64% on the money and spend it tax free.

While it seems weird to prepay, pay again and ask for reimbursement, I don't see anything technically wrong with this in terms of reporting for 1098-T and 1099-Q.

I certainly would never do anything fraudulent or even gray, but I can't tell if this is fraudulent or just smart.

Any opinions.

Reply to
jms2l

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.