Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Sharing Education Credits?

Posted by taxguru on August 18, 2007

Q:

Subject: Lifetime Learning Credit intertwined with a Gift

Hi Kerry,

Longtime reader, first-time e-mailer. For starters, great blog! On to my question…

I am about to begin my second year of law school. For 2006, I took the lifetime learning credit because I had income from the job I held for the first seven months of the year. In 2007, I will have negligible income and the lifetime learning credit will do nothing for ME. My parents will not pay for any of my education.

Are there any roadblocks to the following scenario?:
1) Mom pays for $10,000 of my education expenses
2) I gift Mom $8,000
3) Mom takes the lifetime learning credit for a $2000 deduction
Net results: Mom = even, Me = +$2000

Lastly, would my Mom need to pay the $10,000 directly to the institution or could she simply pay me.

Thanks in advance for your response (and the great service your blog serves)!

A:

After the first reading of your email, my gut reaction was that there were several flaws to your plan.  However, after checking my reference materials on the lifetime education credit, it appears that many of the steps are possible. 

One key point that you forgot to mention was whether or not you are being claimed as a dependent on your mom’s 1040.  If not, she can’t claim any credit for your education costs. 

If you are a qualified dependent on your mom’s 1040, she can use gift money to pay the education costs.  However, that step may not even be necessary.  She also has the option to count payments made directly by her dependent (you) when computing the credit. 

Just to clear up terminology, the lifetime education credit is 20% of the qualified costs, up to $10,000 per taxpayer.  This would result in a $2,000 credit, which is a potential dollar for dollar reduction of her income tax.  This is much more valuable than a $2,000 deduction, which has a savings based on her tax bracket.

You also didn’t say how high your mom’s income is.  There are phase-outs of the credit in order to prevent the people our rules consider to be evil rich from receiving any of this tax break.  If her AGI is over those limits, this is all a moot point.

As always, these are general comments and any specific plans related to this kind of strategy should be developed with the assistance of your and your mom’s personal professional tax advisors.

Good luck.

Kerry Kerstetter


Follow-Up:

Ok thanks. I guess as a law student I should’ve read the lifetime learning credit materials a little closer as I am NOT a dependent anymore.

Thanks for your help!

 

TaxCoach Software: Are you giving your clients what they really want?

 

Sorry, the comment form is closed at this time.

 
%d bloggers like this: