<p>Hi - I've got the happy problem of a relative (a distant relative) offering to make a substantial contribution to my son's tuition each year during his undergraduate years.</p>
<p>We have qualified for, and plan to take, the PELL grant, the SEOG, the federal workstudy, the loans AND the $12,000 that the institution offered as a need based scholarship.</p>
<p>Even after all that aid, I will still have to write a large check each year. The contribution of my relative will cut that out-of-pocket in half.</p>
<p>I'm concerned that my generous relative's check will either turn up as income and be taxable, or will somehow reduce the aid package that we have been offered.</p>
<p>What is the best way for us to accept this help, without seeing it go to waste? Who do I talk to and what questions do I ask?</p>
<p>FYI, we do have a New York State 529 plan, I think I'm the owner (the parent) and he (the student) is the beneficiary. </p>
<p>Ask for to borrow the money at the end of each school year and use it to pay off any non sub loans and put the access in a parental account earmarked for college costs. The money will show up the least for the first two years that way. The loan can be forgiven after graduation.</p>
<p>I think the best way to accept the money is as a “loan” that is forgiven after junior year in college…after that last FAFSA and CSS is submitted.</p>
<p>the loan should be understood that it would also be forgiven if this relative were to die before that time.</p>
<p>The IRS really frowns on family loans unless there is an interest rate close to market rate. The IRS allows cash gifts of up to $13000 a year; anything more than that means the giver has to pay a gift tax. So you may want to talk with a tax person about doing this, just to keep yourselves protected.</p>
<p>For tax purposes, there is an annual $13,000 exclusion for gifts(to anyone for any reason) for each donee. If the transfer is for Tuition or medical expenses you pay for someone then it has a special exclusion and is not even considered a gift (for gift exclusion purposes). If the donee requires more and the donor is married, the spouse could gift the same donee under a separate $13,000 exclusion. I hope this helps.</p>
<p>Thanks for all this help. The relative who is giving us the money has spoken to his accountant and has had his questions satisfied regarding tax consequences on his end. But I’m still concerned about the money showing up as taxable income here, or as some sort of asset or support that will reduce the aid package next year.
To be out in the open about this, the amount is $10,000, and we have the check, made out to my son. Do we deposit it in his bank account? His 529? Do we sign it over to the school? I’m going to hold the check until I find the right course of action. I can always ask for a different check if needed.
Would it be wise/unwise to pick up the phone and call the FinAid office???
With appreciation,
SilverDollarNYC</p>
<p>The issue here is the field on the FAFSA form labeled “Money received or paid on the student’s behalf”. This is where a contribution from a relative would be reported. It’s not taxable to the student, but it’s cash that the student had as income in the base year for FAFSA. In your case it sounds like there’s no tax issue on the giver’s side. The real issue is that it will increase your son’s calculated EFC the year after it’s received. It’s not reported this year since it was (presumably) not received in 2010.</p>
<p>I agree with the other advice above; structure this money as a loan at a fair market interest rate. There are a number of ways this can be done legally - Google “peer-to-peer lending” for some examples of how these agreements can be set up.</p>
<p>You say you were also offered loans. Were you planning on taking the maximum Parent Plus loan? If not, go ahead and take it out and have your relative pay this off over time.</p>
<p>You can always ask the financial aid office about this, but assuming this is a FAFSA school your issue is really how this money is going to be reported on FAFSA, which isn’t up to the school.</p>
<p>Agreed. The problem isn’t taxes. The problem is that next year when you complete the 2011 FAFSA and PROFILE, your student is supposed to report that $10k, and that gets hit up 50% at least for EFC. You lose at least $5K of aid right there. Better, you get loan papers drawn and have the student pay loans on the amount on a schedule. Then he doesn’t have to report that $10K and if audited will have the loan agreement and payments being made there to show and all will be well. His graduation gift will be forgiveness of the principle of the loan. But do make scheduled loan payments at market interest.</p>
<p>Thanks VBallMom and CPTofTheHouse for your clear and authoritative comments. This is exactly what I needed to know. I will do that google for Peer-to-Peer lending and take it from there.</p>
<p>As an afterthought though, on the subject of my EFC becoming larger by $5K; the school’s package is NOT meeting my “need” - there’s was, and still is, a gap between the EFC and the Cost minus Aid (and that gap is larger than $5K.) I’m not sure that a higher EFC would mean any reduction in Federal aid and the State aid that we got. The only worry would be the $12K institutional scholarship. Last question is, is it ok to put this question to the school? Or am I shooting myself in the foot?</p>
<p>If your EFC changes by $5000, will you still be eligible for the PELL? That’s what you need to check. </p>
<p>I think it’s fine to ask the school this question in hypothetical terms: “what if my son’s Aunt Sue were to give my son $10K to help pay for college this year? What are the implications for Federal aid, and what are the implications for institutional aid?”</p>
<p>The answer may well be that you might lose $5K of the $12K they’ve offered in institutional aid, but at least you’d know that before it’s too late to refuse/restructure the gift.</p>
<p>An alternative to the “loan” is for the relative to just give the money to you – not to your child. If the money goes to the child, it would be reported on the FAFSA as “other money received or bills paid on your behalf.” The FAFSA asks that question of the student, but does not ask it of the parent.</p>
<p>As long as the money is a gift to *you<a href=“to%20spend%20as%20you%20see%20fit”>/i</a>, then it does not show up at all on the FAFSA.</p>
<p>So if a family get a million dollar gift, that is not included? I don’t think so. It is other untaxed income absolutely. It isn’t in one of the examples, but does not have to be. There are many things that don’t fit that category. That it isn’t in the stated exceptions is an issue. I would call a financial aid expert and ask. Heck they want Roth withdrawals that are not taxable to be included, so I think an outright gift will certainly need to be reported. Small amounts are probably overlooked in audit since you can’t track every single coffee and lunch and gift card given to someone. But a $10K payment is sure as heck going to raise a flag. Loan papers to show will take care of it.</p>
<p>I doubt that the IRS even knows about 99.999999% of family loans that go on across this country. I’ve never reported to the IRS any money that I’ve lent to family members (interest free, of course)…and I bet few do. </p>
<p>I think an interest free loan is the best way to do this, which is cancelled after the child’s last FAFSA/CSS filing. And, again, with the understanding that if anyone dies before that time, the loan is also cancelled. </p>
<p>If there is a problem that the cancelling of debt will cause an income bump for tax purposes, then it can be cancelled in increments over a few years to come under the gift tax amounts.</p>
<p>I understand your reasoning, CPT, but I’m just curious why you think they intentionally omitted that question about “money received” from the parent income section? It’s not an accident. On the print version of the form, the income questions were arranged in columns. One column for student questions, the next column from parents to answer those same questions. Only at the bottom, on the “money received” question, was the student answer field open, but the parent answer field was grayed-out, indicating that no answer was required. Any idea why?</p>
<p>They omit a lot of things. If dad dies and mom get life insurance proceeds. yes, yes, yes, they are reportable on FAFSA as income. That isn’t mentioned either. That it isn’t specifically listed doesn’t mean it isn’t included. Any and all non taxable benefits are supposed to be included. The things listed are just examples, not the only things. There are also probably some gray area things not listed as exclusions that may be also excluded but an outright gift of cash certainly is not one of them if an untaxable death benefit of a spouse, child or anyone through insurance is not. Same with untaxed portions of an inheritance. Not only are they counted as income, you get the double whammy of them counted as assets if they are sitting their exposed the day you fill out FAFSA.</p>
<p>My friend got zinged on a review for living in a house that belonged to a relative and not imputing market value of rent on FAFSA. Yeah, she got away with it for years, but on review it was made very clear that was supposed to have been reported. </p>
<p>There are some gray areas in this, but a big fat $10K gift check ain’t gonna pass muster.</p>
<p>I doubt that the IRS even knows about 99.999999% of family loans that go on across this country. I’ve never reported to the IRS any money that I’ve lent to family members (interest free, of course)…and I bet few do. </p>
<p>Its fraud. I dont know how many people make loans over 10,000. But if you do charge or impute interest on it, its fraud. Whats the big deal, the impute income with today’s rates is small. The IRS does not “frown” on interest free loans, they just want interest charged.</p>
<p>A gift under the $13,000 exclusion is NOT taxable and is NOT income. It would probably be a good idea to “gift” the money to the parent instead of the child(assuming the child is still a “dependent”), but doing a loan instead is unnecessary and fought with perils.</p>
<p>What do you mean the IRS frowns upon family loans? They do in that they will not give them special consideration. You gotta document them the same way and pay the interest in away that is in line with other loans, but they don’t treat them any differently. Who cares if they frown upon them? They won’t even know unless audited. They frown on anything that tends to be abused but will drop the matter on audit when the documents are produced.</p>
<p>Plumzul, gifts are not taxable. How the IRS looks at it is not a problem Gift tax is a giver thing, and even if you go over the $13K exclusion hardly ever causes gift tax. It just makes you have to do a pain in the neck calculation to make sure the giver doesn’t go over lifetime limits. But FAFSA and income tax issues are not identical. You can make deductions that you gotta add back in for FAFSA . That taxable stuff HAS to be reported is a given on FAFSA, but just because it is not taxable and not listed as an example does not mean it is not reportable as income. Any and all monies and benefits are supposed to be reported. Some things are not going to be caught during verification and are gray area things as many things are even in IRS matters. Just about everyone leaves them off, like baby sitting money, graduation gift money, gift cards, presents. But a big fat $10K check, ummm. I don’t think so. Call a financial aid officer and ask.</p>
<p>Think of it terms of a huge gift. If someone gives you a million dollars (and pays the gift tax on it as he might have to do so) or give you a house, you are going to have to report that on FAFSA. As George Bernard Shaw said to a woman he propositioned and who accepted until the amount of funds was reduced, haggling over the money is a whole other thing than the transaction itiself.</p>