Uncle Sam can help with education costs

Dear Liz: I have rental property, own my home outright, am contributing to a 401(k) and have a pension, so finances are not a big issue. I do have an adult son in law school and would like to know the most fiscally prudent way to pay for it. Are there limits on gifts, and can the money be tax deductible since it is an investment to increase his future earnings?

Answer: Interest on student loans is generally tax deductible for the person who takes out the loan if his or her income is below certain limits (the deduction begins to phase out at $50,000 adjusted gross income for single filers and $100,000 for joint filers), said Mark Luscombe, principal analyst for CCH Tax & Accounting North America.

Education tax credits also can help offset college costs. The American Opportunity Credit is limited to the first four years of college, but law school expenses could qualify for the Lifetime Learning Credit, Luscombe said. The credit starts to phase out at $53,000 of adjusted gross income for single filers and $107,000 for joint filers, he said.

If you don’t qualify for other credits and your son is under age 24, you may be able to deduct up to $4,000 in qualified education expenses if your income is below certain limits (modified adjusted gross income of $160,000 if married filing jointly or $80,000 if single), Luscombe said. You can find out the details in IRS Publication 970, Tax Benefits for Education.

Another potential tax benefit has to do with the gift tax. You can avoid the hassle of filing a gift tax return, or using up any portion of your gift tax exclusion, if you pay tuition or medical bills for someone else. You have to pay the provider directly — you can’t cut a check to the person receiving the services.

Normally, you’d have to file a gift tax return if you gave any recipient more than the gift tax exclusion limit, which is $14,000 in 2013. You wouldn’t be subject to an actual gift tax, however, until the sum of the contributions over that $14,000 limit exceeded your lifetime gift exemption. The gift exemption is currently $5.25 million, so the gift tax is an issue that few people face.

If you are that rich and generous, then you’ll probably want to discuss your situation with a qualified estate planning attorney to find the best ways to give.

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  1. Many, many law-school grads would be financially better off if they hadn’t gone to law school. Unless your adult son is an exceptional student, the fiscally prudent path may be for him to drop out.

  2. Ugh, tell him not to go to law school. It’s such a bad value proposition. If he cannot afford to go and cash flow it himself, he shouldn’t go. And if he is already in, he should drop out. I’ve been out of law school six years and I still don’t make more than I was making before I went to law school. Why? Because the distribution for law salaries is bi-modal. There is a chunk at the top, and then a big chunk at the bottom. Guess where most people fall? The bottom.

    I will pay off my house long before I pay off my law school loans, and that is just ridiculous.

    It’s not too late for your son to do something that will actually return a yield on HIS investment.

    • I can think of one thing worse than running up big debts to get a law degree, and that’s running up big debts without getting the degree. Then there’s no chance of an economic payoff that could justify the debt. In this situation, it’s not clear the son will be piling up debt as the parent has already indicated an ability and willingness to help pay for his education. In general, though, your point is well taken. Too many otherwise smart people sign themselves up for massive education debt assuming it will pay off. Law degrees are particularly problematic, as there are too many lower-tier schools churning out far more graduates than the market can absorb.

  3. It depends on how long the son’s already been in school. One semester of costs + no degree is probably better than six semesters of costs + a degree.

    The son is extremely fortunate to have a parent willing to gift him tens or hundreds of thousands of dollars to help him prepare for his future. Parent and son alike should think seriously about whether there are better ways to use that money than on law school tuition. Just because the bills are being paid for out of savings rather than by running up debts, doesn’t make it any more OK to blindly spend the money without considering the consequences. And the fact that the letter writer considers law school to be “an investment to increase (the son’s) future earnings” suggests that he is blind to the realities of the job market in law today.