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Let your college student take the new Hope credit?

The changes to the Hope Credit in the stimulus bill seem to offer an opportunity for the higher income taxpayer to capture the benefits by allowing the student to take the credit. Consider this scenario:

Parents are over the AGI phase-out for the Hope Credit (and this also means that qualifications for financial aid are not a concern). Son is about to enter college in fall 2009.

For 2010 (maybe 2009 as well), parents gift appreciated assets to son. Son uses the assets for college tuition and other expenses, to the point where he can claim that he provided over 50% of his support. Parents do not claim son as a dependent. Son claims self as dependent, taking the Hope Credit. Son may have a little interest or dividend income (from assets after gifting) and a summer job, and the Hope credit eliminates any tax on that income. Hope also eliminates capital gains if due on gifted assets (would he pay at parents rate since he is under 21?). Remainder of Hope is taken as a refund. At worst, he gets the $1000 refund (and parents lose about the same amount by not having him as a deduction). At best, he also offsets other income (summer job and interest/dividends) that would be taxable otherwise.

Son goes to a state University, with tuition around $8000 per year and total expenses around $20,000. If parents also have a 529 account for son, they can withdraw the full amount of qualified college costs - less $4000 used for the Hope Credit. Let's say that is $16,000 for this example.

Parents gift the son $20,000 in appreciated assets. Parents take $16,000 out of 529 and keep the funds for themselves. What prevents parents from doing this?

Bottom line - it looks like you can benefit by having your college student take the Hope Credit. Even if all his college money is in a

529 account, it seems that shouldn't get in the way....and may allow you to shelter even more income by donating appreciated assets.

Your thoughts?

Reply to
adwagner
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This has been possible under existing law. It does get more interesting with the enhanced credit and partial refundability.

The provision is effective for 2009 and 2010.

This assumes that the parents can withdraw money from the account. That's going to be a matter of the state law under which the 529 was established. (I have no idea.) Also, I'm not sure whether you realize that nonqualifed use of 529 distributions results in taxable income on the student's return, not the parents'.

But overall, yes, Congress once again has simplified the law to give more impetuts for buying tax software to play around with the different possibilities. All segments of the economy should be stimulated. Unfortunately, for 2009 planning you're stuck with pencil and abacus.

Reply to
Phil Marti

Thanks Phil. I just read today (in two separate locations) that children cannot take this $1000 refund. One report indicates that the child cannot take the refund if he/she is covered by the Kiddie Tax. Another site indicates that "a child cannot claim the credit unless he or she provides more than half his own support."

If the child's support must come from earned income, this just about kills the issue for people in higher income brackets with a 20 year old (who only works a summer job) in college. I believe the Kiddie Tax includes those children for whom earned income is less than 50% of their support....which is a different test than qualifying for a personal exemption.

If the support can come from gifted assets, we are still in business for the Hope Credit.

For parents whose income is high enough for the child's personal exemption to be phased out, having the child take the Hope Credit may make sense. But if the parent's income allows the full benefit of the child's exemption, it isn't a no-brainer to let the child take the credit.

I have a child going into college this fall, so these issues are a bit new to me. In addition, the recent changes have added some new twists. So, I appreciate any planning tips you folks have in this area (or corrections to my thinking).

Best wishes.

Reply to
adwagner

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