Gifting money for college

If a relative gifts a parent money to be used for their child’s college, is there any possible FAFSA implication in future years? The other possibility would be the relative doing a one-time accelerated gift contribution into a 529. Thoughts? Suggestions? Should they pay it directly to the school each year? (yes they have committed to all 4 years so lets not explore the “what if they don’t pay in later years” issue)

Can they hold off and pay towards loans after graduation?
Otherwise it seems like it will need to be noted somewhere.

It has to be listed on the Fafsa as monies paid by others on your behalf which can change the EFC

Thanks. They want to pay it now, as tuition is due. Any ideas?

Sybbie, if the other person gifts the money to the parents…and the parents then pay the college bill, I don’t believe this has FAFSA implications in future years.

Also, the gift could be placed in a 529, and woild be assessed at the parent rate for FAFSA purposes, right?

Hoping someone like MiddKid or annoyingdad will see this thread.

Which is better- to give the $ to the parents or pay directly to the school? WIll it have any potential implication as “income” under any circumstance?

Paid directly to the school makes it money that was paid on the student’s behalf by others, and it will need to be accounted for in the FAFSA next year.

Gift to the parents, I’m not sure about. If it is a big enough amount, it could create a “gift tax” event for the giver, but I don’t think it creates any event for the receiver. In which case I don’t think it would need to be reportable on the FAFSA.

In the past, the advice here usually has been that the givers set it up as a formal loan, and have rules about loan forgiveness built into the loan documents (forgiven on death, forgiven on graduation, whatever), or that it be passed through a student or parent 529.

I think some of the posts here are on the right track. Money paid directly to the school would not have gift tax implications, no matter the amount, but would need to be reported on FAFSA as student untaxed income under “money received or paid on student’s behalf.” I don’t see where money gifted to a parent would be reported on FAFSA as parent untaxed income, but of course if the gifted money was still in parent’s possession (in a bank account, under the mattress, whatever) at the time FAFSA was filed, it would need to be reported as a parent asset.

For a one-time accelerated gift contribution into a 529, it depends on who the 529 account owner is as far as FAFSA implications.

If it’s under the untaxable amount of $14000 (I think), I don’t believe it needs to be reported. I don’t believe it qualifies as “income”. I’d have the gift paid directly to the school. When asked about bills paid by others, I think they are referring to other bills.

$14,000 is the current annual exclusion amount. A gift of more than that in any one year to any one person needs to be reported. And yes, for FAFSA purposes, a gift to the student does get reported as untaxed income under “money received…” And yes, bills paid on behalf of the student should include education expenses.

Thats what I thought, Middkidd86. Thanks. So, if a one-time accelerated 529 is available to this person, do you recommend they do that over paying it each semester directly to the school for the student? If they gift it to the parent each year (it will be under $14k), as long as the $ isn’t in their account when they fill out the FAFSA, is it seen as just a gift and not unearned income? Which would you recommend?

Middkid…but a gift to the parents would have no tax implications, would it?

I like the loan idea with forgiveness after graduation at $14k/year (or max annual exclusion) per donor (ß28k per grandparent set).

If it is under $14K, it should be given to the Parents each year, after they fill out the FAFSA, and the Parents can pay the school. It would not need to be reported on the FAFSA. If it is given to the pass through 529, or paid directly to the school, then it needs to be reported on next year’s FAFSA.

I think you have the right idea of spreading the payment over 4 years - if they gift is given all up front, then the 3/4th’s of it remaining after year one are counted among the Parent’s assets for the FAFSA in year 2, while 1/2 is left for year 3, etc. But if there has been a committment to pay all 4 years, won’t all of it need to be listed anyway?

Sometimes it may make sense to not give any of it until after college - let the student take loans, then repay them immediately after graduation. But there are risks to this, of course.

This assumes the goal is to minimize both parent and student assets and income on the FAFSA in order to maximize potential need based financial aid.

No tax implications for the gift recipient, but if the annual exclusion amount is exceeded, the gift giver will need to file a gift tax return (IRS form 707). In the great majority of cases, this is a reporting requirement only, with no tax actually being owed.

The 529 question depends partly on who the account owner is. Is it the gift giver, who retains control of the asset? Is it a parent, who must report the 529 balance as a FAFSA asset? Or is it the student, in which case for FAFSA the account is treated as a parent asset? Payments from a 529 account not owned by the student or a parent, as well as payments made directly to the school by a third party, will need to be reported on FAFSA as student untaxed income.

Yes, I believe this is correct.

Checking for clarity…is this correct…

A gift to the parent will have no tax implications for the recipients (parents or student) at all if below the $14,000 threshold.

And a gift to the parents will not be reported on the student’s FAFSA as income of any kind.

And if the parents pay the costs and the money is not in their account the day they file the FAFSA, it is not an asset either.

Correct?

Generally, a gift never has tax implications for the recipient, no matter the amount.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes

I believe that this is correct. I don’t know where a gift to a parent would be reported as income on a student’s FAFSA, as there is no question in the parent financial section that corresponds to the question in the student financial section regarding “money received, or paid on your behalf, not reported elsewhere on this form.”

Yes, that is my understanding. It’s important to note that the gift given to the parents must be given without strings attached in order for it to be considered a gift in the legal sense of the word. Of course, a third party could give a gift to a parent saying “I would like you to use this for Johnny’s college, and I plan to give you something the next three years as well.” If the parent spends the money on a trip to Vegas instead, that would be within his/her rights, but I wouldn’t expect the third party to give any more money.

Thank you MiddKid.

My question about the 529 one time contribution assumed that the aunt would have it in her name with the niece (the student) as beneficiary. That might feel cleaner to them. Thoughts, middkidd?