Grandpa (MFJ) offers to help grand-daughter (not his dependent or exemption) pay off part of loan to attend trade school.
Grandpa reads Pub 17 and concludes that he has no place to deduct nor any credit to take. Just feels good.
Is Grandpa's conclusion right?
Yes.
If grandpa's gifts to his grandaughter, including paying off the student loan, exceed $13,000 in 2009, he also has to file a gift tax return.
Not if he pays the tuition directly to the school.
The loan was already in place.
ChEAr$, Harlan Lunsford, EA n LA
Grandpa is a nice guy.
If you have other kids in college or who will be in college during this period, and are eligible for any financial aid, it might be better for Grandpa to wait until all the kids are out of school. Otherwise, depending on your situation and the exact timing, any money Grandpa gives you will count as income for FA purposes, and this could cost you significant FA money.
That sounds like a "tail wagging the dog" situation. Should one pass up a $10,000 certain gift against a chance to receive $5,000 in financial aid? Or try to defer a gift to a future date when it may no longer be offered?
Maybe Grandpa wishes to help this specific granddaughter for his own reasons. How would his gift to a granddaughter impact the parent's income for financial aid purposes related to other children?
-Mark Bole
It's not really the tail wagging the dog, just smart financial planning at a multi-generational level. If the family dynamic is such that the gift might not be offered later, this of course has to be taken into consideration.
This is how the financial aid system works. Virtually all income - including gifts, 401k/IRA contributions, some other pre-tax benefits
- are counted as income available to pay for college. And it takes surprisingly little income to hit the 47% bracket, where 47 cents of every dollar is considered available for college. That $10,000 gift could easily cost the family $4700 in FA.
Grandpa is trying to find a way to get a tax advantage from the gift. If he doesn't fully analyze the situation, he could wind up paying a
47% "tax" instead.
Maybe it's changed, but when I was filling out FAFSA forms, they wanted to know my income and my child's income, but they did not ask about the income or assets of the other children.
-Mark Bole
Grandpa provides more info:
a) the total tuition is less than the amount which would require a gift tax filing. .
b) the help is being offered as a reward for "shaping up and flying right". The grandchild is an adult who has lived away from home since she was 16
c) the next grandchild is only 4 years old and has prosperous parents.
Many thanks for the comments. They have been useful even if not helpful in this specific case
Helpful is in the eye of the beholder. You got some helpful information regarding the gift tax and special rules for paying education-related expenses of a non-dependent.
More importantly, your original question about Grandpa's Pub 17 encounter was answered.
For more help, more information would help. Who is the borrower, who is the lender, where did the proceeds go, and who pays the interest, of the loan that Grandpa proposes to pay off with his gift (which may in fact have strings attached)?
-Mark Bole
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