If my mom pays tuition bills, who can take the tax deductions?

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Q. My mother wants to pay for college for my kids. She makes too much to take the tax deductions. Is there a way for me to take the deductions?
— Looking for savings

A. It’s very generous of your mom to make such an offer.

And college tax credits can be valuable.

Let’s review how they work.

The first is called the Lifetime Learning Credit, which is available for qualified students from qualified institutions in the U.S., said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

He said qualified institutions also include technical schools.

Check here to see if an institution is considered an accredited postsecondary institution or program.

“For tax year 2022, the credit is 20% of the first $10,000 of qualified expenses capped at $2,000,” Maye said. “Those eligible to claim the credit include the person, their spouse or eligible dependents.”

Income levels also matter.

“The credit is fully available for individuals making less than $69,000 and fully phases out at $80,000,” Maye said. “For married filing jointly, the credit is fully available for income below $138,000 and fully phases out at $180,000.”

Maye said the credit can only be used to offset tax liability, so there’s no credit if the person has no income tax liability.

The second credit is the American Opportunity Tax Credit.

Maye said the credit available is 100% of first $2,000 and 25% of the next $2,000, for a maximum of $2,500.

For this, he said, the student must be pursuing a degree or recognized credential to be eligible, along with some other requirements.

The credit is fully available for individuals making less than $60,000 and fully phases out at $80,000, he said. For those married filing jointly, the credit is fully available for income below $160,000 and fully phases out at $180,000.

“This credit is partially refundable, meaning even with no income tax liability they can still receive up to 40% of the credit,” he said.

Now to your specific question.

“Assuming your income would allow for one of the credits, your mother could gift you the money and you could pay the college tuition,” Maye said.

Your mother could gift you up to $16,000 per year without the need to file a gift tax return, he said, and the $16,000 can be increased to $32,000, assuming your parents each gave you $16,000 in what is known as a split gift, Maye said.

This is known as the annual exclusion, he said.

“As an additional point, if your mother paid or made direct tuition payments to the school on behalf of your kids, those payments are not subject to the $16,000 annual exclusion amount nor do they reduce her lifetime gift tax exemption,” he said.

If your mom made the direct payments to the college and you are claiming the kids as dependents on your return, you would be able to claim the credit if you meet the eligibility requirements.

For more details see IRS Publication 970 Chapter 2 where it discusses expenses paid by others.

“One other important planning point is that cash gifts to a student, including payment of tuition bills, is considered untaxed income on the child’s FASFA where student aid is determined,” Maye said “The same is not true if money is gifted to the child’s parents.”

The main takeaway, Maye said, is that the best choice depends on the unique circumstances of you and your parents’ situation in terms of financial aid impact, income tax planning and estate planning.

Good luck to you all.

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This story was originally published on Sept. 26, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.