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Question for the Money Doctors

Question submitted on Apr 13, 2017.

Question

How can I help my nephew's child pay for college and write the money off with out paying taxes on the money?

Answer

When you pay the tuition for a non- or distant relative, the tax breaks are limited.

Federal education credits and the tuition deduction are available only when the recipient is claimed as a dependent on your tax return.  Your nephew’s son most likely does not meet this qualification.

Many states offer full or partial tax deductions for contributions to a 529 savings account, regardless of your relationship to the beneficiary.  The 529 College Savings Plan is a program established specifically to save for higher education costs.  Investments grow tax free as long as withdrawals are for tuition and other qualified expenses, such as fees, room, and board.  Look into the rules for your state and see if this is an opportunity of which you can take advantage.

One other option might be available if you own a business and can employ your nephew's child.  That might create an opportunity depending on each of your tax brackets.  If you are in a higher tax bracket and your nephew's child in a lower tax bracket, the rate difference would help cover some of the college expense, along with the net wages themselves.  Your company would get a tax deduction for the wages paid and those proceeds could be utilized for college expenses.


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