When Grandparents Pay the College Bills

Our son's grandparents have volunteered to pay his remaining college tuition directly to the school. Can they get a tax credit for any portion of this, even though he is not their dependent child?

Grandma and Grandpa won't get any rewards from Uncle Sam for their generosity, but you might. Grandparents qualify for the Hope and Lifetime Learning tax credits only if they're paying college bills for themselves or for a dependent they claim on their tax return, which isn't the case in your situation.

However, as the parents, you may be able to take the Hope or Lifetime Learning credit for the grandparents' contribution. To be eligible, the bill must be paid directly to the college, and you must claim your son as a dependent, says Mark Steber, vice-president of tax matters for Jackson Hewitt.

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To qualify for the Hope credit -- up to $1,650 per child in each of the first two years of college -- your adjusted gross income in 2007 must be less than $114,000 if you're married filing jointly, or less than $57,000 for single filers (in 2008, the credit increases to $1,800 and the income limits rise to $116,000 for joint filers and $58,000 for singles). The same income limits apply to the Lifetime Learning credit, which can be as much as $2,000 per tax return.

Your son's grandparents do get one tax benefit, especially if they're trying to shift money out of their estate. Because they're paying the college directly, rather than giving the funds to your son, the money doesn't count toward the $12,000 gift-tax limit for 2007 (that limit remains the same in 2008).

Grandparents may be able to get a state income-tax deduction for contributing to a 529 college-savings plan, which can be helpful before the tuition bills come due. For more information about how grandparents can benefit from making 529 contributions, see The Best College Savings Plan. The tax-deduction rules vary a lot by state. For details about who qualifies for the write-off, see Who Can Deduct 529 Contributions?

For more information about the rules for education-related tax benefits, see IRS Publication 970 Tax Benefits for Education. For college-savings advice, see The Best Way to Save for College and College Saving 101.