What makes you think the IRS (or whatever) says it’s a bad idea? The IRS has special tax rules that encourage this practice.
@MiddKid86 - thank you for that tip. I am an only child and the sole heir to her estate, thus if anything happens to her the earmarked money would still go to her grandkids. That being said, I sure hope she lives a long healthy life. I am looking forward to seeing the joy on her face at their college graduations.
If she isn’t going to get need based FA anyway, it won’t matter. It is not the IRS who cares, it is FAFSA (and CSS?) which requires any amounts paid by others (not parents) on behalf of the student, so it would reduce the need based aid. MIL can pay directly, she can give the money to you, or a mix of the two.
That’s a wonderful sentiment, and I certainly hope it comes to pass. Even in your situation, the benefit to a POD account that has been set up for college funding is that the account assets aren’t tied up in probate. If you should need funds from the account to pay a tuition bill and the probate process is ongoing, you may find yourself in a jam, even as the sole heir. A POD account is typically available to the beneficiary upon presentation of a death certificate; no probate issues.
@MiddKid86 I think you might have misunderstood me. Or more likely I was unclear. My question was if there is a “penalty” for DMIL to pay directly and what are the implications going forward vs her gifting us money and us paying the tuition directly. Our kid is a junior and I haven’t done FAFSA yet or our own taxes since before we owned a home. But this is something to let DMIL know , Thanks
ETA this was in reference to @mom2collegekids post.
There is a FAFSA “penalty” (resulting higher EFC) if a third party gifts money to the student or pays a bill on behalf of the student. But as was mentioned above, if your kid won’t qualify for any need-based aid anyway, then it doesn’t matter.
The IRS is a different story. Money gifted to you and your husband is potentially subject to gift tax reporting, even if you turn right around and send it to the school to pay a tuition bill. If the gift giver sends it directly to the school, however, there are no gift tax implications.
Yes, my mother has made checks out to NYU directly and it is not counted as a gift for tax purposes.
Money gifted to parents is not reported on FAFSA but is reported on CSS Profile- “Enter the amount of cash your parents received”
Thank you @MiddKid86. DMIL gifts us money from time to time and we (and more importantly she) understands the tax implications and what she can give. I was thinking if she gifts us money AND pays DGD16’s bill she could give more IF she wants to .
Right…doesn’t clout for tax purposes…but if your kid applies for financial aid the following year, it MUST be included as money paid on the kid’s behalf on the FAFSA and Profile forms for NYU.
She can gift you money with NO implications on the FAFSA.
If she pays the college bill, her money for those payments MUST be included on the FAFSA and Profile the following year.
Is grandma married? If so, she can gift you an amount, and her husband can gift you an amount, I believe.
Okay, I’m getting confused as to which advice is addressed to whom.
@sandromo - so how does this affect aid the following year at a CSS school? Hypothetically, a grandparent could give a one time gift to the student. If FA is recalculated for sophomore year, that could spell trouble for us. That’s what I’m worried about.
@MiddKid86 - she has a living trust, and I’m the trustee if she passes, so POD is not necessary.
It seems that there is a bit of a timing issue. The FAFSA (IIRC) askes for data on the PAST tax year. So, if D enter’s college Fall of 2015, the FAFSA data is supplied for tax year 2014. At that time grammy would not have made any payments on behalf of granddaughter. So, parents / student would not be declaring any additional funds. Now, in Fall 2015 if parents pay the tuition for the first quarter/semester and defer grammy payment until the spring of 2016, it seems that nothing was given to grand daughter for tax year 2015 and GD could and parents can reap full FA for 2016 (since again, reporting would be for tax year 2015 where no grammy payments applied). Grammy’s payments wouldn’t have to be reported until 2016. At which point certain grammy payments could be prepay for the following year and have the funds held on account. It seems that the family could benefit from full FA for at least 3 of the 4 years.
Then again, I haven’t looked at it in detail in a while.
@thumper1 she is widowed. She usually gifts money to both me and her son.
^^ let me see if I have this straight…
fall 2015 parents pay for fall semester 2015 (I) (freshman year) only. FA is based only on parents’ income.
after 1 jan 2016 but before 1st day of classes, grammy pays for spring 2016 semester (II) costs after FA. thanks, grammy!
15 april 2016 parents file tax returns for 2015, when they (and DC) did not receive aid from grammy.
spring 2016 parents apply for FA based on 2015 income, for 2016-2017 school year (soph), declaring no support from grammy last year. they get FA.
fall 2016 grammy pays for entire 2015-2016 school year (soph, 2 semesters III-IV) costs after FA. thanks, grammy!
15 april 2017 parents file tax returns for 2016, when they received aid from grammy (who has now paid for 3 semesters).
spring 2017 parents apply for FA for 2017-2018 (junior) school year, noting support from grammy in 2016; they get no FA.
fall 2017, parents pay for fall semester only (junior year, V)(full price).
spring 2018, grammy pays for spring semester (junior year, VI) before 1st day of classes. thanks, grammy! (4th semester paid by grammy overall, first at full price).
spring 2018, parents apply for FA for 2018-2019 (senior) school year; they received no aid from grammy in 2017. they get FA.
fall 2018, grammy pays costs for 2018-2019 school year (senior year, semsters VII-VIII) after FA. (5th and 6th semesters paid by grammy overall). thanks, grammy!
so basically parents can get FA for semesters I-II, III-IV, and VII-VIII; grammy could pay the costs after FA for semesters II, III-IV, VI, and VII-VIII, with only semester VI being full price; and parents could pay full price for semester V?
it seems like that shouldn’t be legal…
There is nothing illegal about it.
In fall 2016, grammy is paying for entire 2016-2017 school year (thanks, grammy!), not 2015-2016.
Aren’t grammys great 
i’m not saying it is illegal; i don’t know enough about the rules to determine that. i’m just saying it seems like it should be illegal. which is probably the definition of a “loophole.”
Completely doable, as long as the college doesn’t require the spring semester be paid before January 1st.
The rules are the rules. As long as you’re following them and reporting honestly, no issues.