Every year each individual is allowed to give an unlimited number of tax-free gifts. For 2014, that gift amount is $14,000. Also, direct payments of tuition to educational institutions or direct payments of medical care to providers made on behalf of another person are not subject to gift tax. However, if the payments must be direct- reimbursing the person for either is a taxable gift.
What does this mean? With a little creativity, large amounts of money can be moved around tax-free. Look at these examples:
A couple has a married child. If each parent gives the child and the spouse the gift limit for the year, they can make four gifts and transfer $56,000 tax free.
If grandma and grandpa want to help pay for college, they can write checks directly to Junior’s university and avoid paying gift tax.
The cost of high education keeps rising. If you, or a dependent, are in college make sure you take advantage of the tax breaks you might be eligible for. The neat thing here is that you are allowed to take the credit or deduction with the best tax benefit for you. So hand your CPA that 1098-T tuition statement and make sure he or she chooses the right one for your situation!
American Opportunities Credit (AOTC)
The AOTC (formerly the Hope Credit) is available for the first four years of college when a student is pursing a degree. Eligible students can get up to $2,500 annually. To be eligible the student must be enrolled at least half time, have not claimed the AOTC or the Hope Credit for more than four years, and not have a felony drug conviction.
The bad news- the AOTC might be limited depending on your income. If your income is over $90,000 for single or $180,000 for married filing jointly you cannot claim the credit.
Lifetime Learning Credit (LLC)
The LLC is available for an unlimited number of years for undergraduate, graduate and professional degree courses. The credit is worth up to $2,000 per tax return. Claim the LLC if the student is still in school after the AOTC has run out.
The bad news- the LLC might be limited depending on your income. If your income is over $62,000 for single or $124,000 for married filing jointly you cannot claim the credit.
Tuition and Fees Deduction
The tuition and fees deduction works a little differently than the AOTC and LLC. The deduction reduces your income by up to $4,000 without requiring you to itemize your deductions. This can be helpful if you are not eligible for the tax credits above.
The bad news- the deduction might be limited depending on your income. If your income is over $80,000 for single or $160,000 for married filing jointly you cannot claim the credit. Married filing separately filers cannot claim the deduction.
I am so excited to share with everyone the post I wrote for Kveller.com! This post is about 529 savings plans for paying for education. Find the article here. Follow Kveller on Facebook or Twitter. Watch for additional posts from yours truly!!!