Potential Gifting - Education Credit Strategy
Prior to the kiddie tax age being increased to include full time students through age 23, a commonly used tax strategy was to gift appreciated stock to a child and then have the child sell the stock at a lower tax rate and use the funds to pay for the child’s education.
Since there is no longer any tax benefit to gifting appreciated stock to a full-time student under 24 to pay for education, what if the grandparents or other trusted relative or friend are in a lower tax bracket and....
The child's parents gift each grandparent or sets of grandparents enough appreciated stock that when sold would yield an after-tax amount that the grandparent in turn uses to pay the child's tuition?
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Gifts used for education (only tuition) are not subject to gift tax so the grandparents would have no gift tax issues. Caution - Grandparents (or whoever) would need to make tuition payments directly to the educational institution to avoid the gift tax issue if the amount gifted exceeds the annual gift exclusion.
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If the grandparents are retired, their income might be such that they would be in the zero capital gains tax rate. Caution – Be careful that the additional income from including the gain upon sale of the stock doesn't cause the grandparents to have more taxable Social Security income or have other detrimental effects on AGI-based limitations.
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Assuming the parents claim the child as a dependent, and their MAGI permits, they would be able to claim the education tax credit since the credit goes to the individual claiming the dependent even if they did not pay the tuition.
Caution
If the parents' MAGI causes the education credit to be phased out (or eliminated), it makes using this strategy less appealing – but if the parents would have sold the stock to pay for the education expenses anyway, transferring the gain to the grandparents would still be an appropriate strategy as it will reduce the parents' AGI for various phaseouts. It would help lower the parents' state tax, especially if the state doesn't have a capital gain tax rate but could increase the grandparents' state tax – so you’d need to run the actual numbers to see if there's an overall family savings.