If you’re a grandparent and you want to help your grandchildren pay for college, one option is to pay off their student loans. Doing so will help them avoid paying high interest rates on student loans. In this post, we review the details of: can grandparents pay off student loans, can grandparents pay for daycare, is paying someone else tuition tax deductible, tax deductions for grandparents and gift tax education exclusion for tuition.
When you borrow money for college, the lender is usually a federal or state agency, such as the U.S. Department of Education or your state’s Student Loan Authority. In some cases, private lenders also offer student loans. Read on to know more about: can grandparents pay off student loans, can grandparents pay for daycare, is paying someone else tuition tax deductible, tax deductions for grandparents and gift tax education exclusion for tuition.
If you took out a loan and your parents cosigned it (meaning they are responsible for paying it back if you don’t), they can’t get rid of your obligation by paying off the loan. But if they give you money directly to help out with college costs, that’s another story.
And this brings us to our first question: Can grandparents pay off student loans? The answer is “yes.” They can pay off any amount of money that remains after subtracting any other financial aid or income-based repayment plans from the total amount owed on your loans, according to the Consumer Financial Protection Bureau (CFPB).
can grandparents pay off student loans
We begin with: can grandparents pay off student loans, then can grandparents pay for daycare, is paying someone else tuition tax deductible, tax deductions for grandparents and gift tax education exclusion for tuition.
Grandparents can contribute a lump sum to a grandchild’s 529 account, or they can contribute smaller, regular amounts.
Tuition payments made directly to a college aren’t considered taxable gifts, no matter how large the payment. But this is true only for tuition, not room and board, books, or fees.
The most important thing for grandparents to remember is that any contributions must be reported as income on their grandchild’s tax return. This means that if the amount of money in the account grows enough to cover all of the student’s expenses for four years at college and then some, it will still be taxed at the same rate as any other income—meaning that if it earns too much interest, it could push them into a higher tax bracket than they would normally be in.
can grandparents pay for daycare
Next, can grandparents pay for daycare, is paying someone else tuition tax deductible, tax deductions for grandparents and gift tax education exclusion for tuition.
If you’re a grandparent, you may be wondering whether you can pay for daycare.
The answer is yes—as long as the daycare facility is an educational institution with a regularly enrolled student body. This means that if your grandchild is enrolled in a preschool or elementary school, you can sponsor his or her tuition as long as it’s paid to the school.
If your grandchild is enrolled at a different kind of institution—like a vocational school or private high school—you can’t cover the costs.
is paying someone else tuition tax deductible
More details coming up is paying someone else tuition tax deductible, tax deductions for grandparents and gift tax education exclusion for tuition.
You can deduct from your taxable income the tuition that you pay for yourself, your spouse or your dependent children. For you to be able to deduct tuition paid for any other relatives, those relatives must also be your dependents, and you must claim an exemption for them on your tax return.
You can only deduct up to $5,000 per year of tuition and expenses paid for the qualified individual. The amount of your deduction is the lesser of:
The amount paid for tuition and required fees (after applying a 40% limit) plus any expenses incurred in connection with enrollment or attendance at an eligible educational institution; or
The amount by which qualified higher education expenses (the cost of tuition, fees and course materials) exceed total income received during the tax year.
tax deductions for grandparents
When you’re caring for your grandchildren, you may be eligible for a number of tax deductions that can help you keep more of your hard-earned money. One such deduction is the Child and Dependent Care Credit, which offers up to $1,050 per qualifying child (under age 13) and $2,100 for two or more qualifying children. You can claim these credits if you paid someone to look after your grandchildren while you worked or looked for work.
You may also be eligible for tax credits that cover the cost of daycare services and supplies. The Child Tax Credit provides up to $1,000 per qualified child under 17 years old—and it’s not just limited to one child either; if your grandkids are split between two or more households, this credit can apply to each household with their own children!
gift tax education exclusion for tuition
There is a way to get around the gift tax exclusion for tuition payments. One alternative to making tuition payments directly to a college is to contribute the money to a child’s 529 college savings plan. 529 plan contributions are considered gifts for tax purposes, and up to $16,000 qualifies for the annual gift tax exclusion.
This exclusion can be used every year, so you can make multiple contributions without incurring any gift taxes or penalties. If you have more than one child in college at the same time, however, there are restrictions on how much you can contribute each year. If both of your children attend the same school and live in different states, then you can contribute up to $30,000 per student per year—for example, if both your children attend an out-of-state university and live at home during breaks between semesters.
The amount of money you contribute must go directly toward tuition or other qualifying educational expenses; it cannot be used as part of an income-contingent repayment plan such as Income-Based Repayment (IBR). You must also be able to show that this was your intent from the start by signing an affidavit stating this purpose when opening the account with your financial institution.