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Hi, all.

My wife's nephew just got accepted to Indiana University for a 2-year Master's degree program. (Hurray!)

He is Russian, has no money, and so we will be footing the bills for the degree, room and board, insurance, and car. Probably $50,000 all-in. (Boo!)

I am looking for ideas on how to lessen our financial hit. Specifically, I am wondering if we can deduct some of these costs by claiming him as a dependent. He's a close relative -- son of my wife's maternal half-brother. He's 21 years old. And he will be living with us at least initially.

Anyone ever dealt with a situation similar to this, and found tax advantages in it?

TMFDitty
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I am wondering if we can deduct some of these costs by claiming him as a dependent.

Your big issue is probably going to be whether he meets the citizenship/residence test for being a dependent as described in Pub 501. If he's here on a student visa he'll be treated as a nonresident even though he's physically present in the US. See Publication 519.

Phil
Rule Your Retirement Home Fool
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so we will be footing the bills for the degree, room and board, insurance, and car. Probably $50,000 all-in. (Boo!)

I am looking for ideas on how to lessen our financial hit.


Draw up a contract that requires him to start paying you back upon graduation and make him sign it.

--fleg
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Thanks, Phil.

I'll highlight the issue. Not sure how it's relevant yet, but I imagine I'll learn that next April ...

Rich
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...we will be footing the bills for the degree, room and board, insurance, and car. Probably $50,000 all-in.

That's a fair chunk of change in a short time. This can run afoul of imputed income to your nephew kinds of things. A loan contract, as suggested by another would help alleviate this.

Also, gifting him the money (your wife and you each doing so brings the annual amounts under your collective gift limits) would alleviate this, too. For this large a set of gifts, you'll likely want to keep careful records in case the tax man comes a-calling. And the gifts will count against your lifetime limit on this sort of thing (it's a large lifetime limit, so even $50k isn't much of a hit...).

Eric Hines
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...we will be footing the bills for the degree, room and board, insurance, and car. Probably $50,000 all-in.

That's a fair chunk of change in a short time. This can run afoul of imputed income to your nephew kinds of things.


How? Nothing in OP's scenario produces taxable income to the nephew under any theory I've heard of.

Also, gifting him the money (your wife and you each doing so brings the annual amounts under your collective gift limits) would alleviate this, too.

It would help for OP to pay the tuition directly to the school. That is gift-tax free and doesn't count against the $13,000 annual exclusion. On top of that OP and spouse could gift $26,000 in a calendar year without incurring any gift tax responsibility other than possibly having to file a gift tax return.

Pub 950 has an overview of gift tax.

Phil
Rule Your Retirement Home Fool
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It would help for OP to pay the tuition directly to the school.

We will certainly be paying the tuition directly to the school. The real question is whether we can then deduct this expense under one of the education-friendly tax "loopholes."

As for gifts ... we'll basically be absorbing Nephew into the family, so the cost of his housing, food, etc. will just become part of the general household budget.

Rich
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We will certainly be paying the tuition directly to the school. The real question is whether we can then deduct this expense under one of the education-friendly tax "loopholes."

Alas, no. You can get education tax benefits only from expenses paid for yourself or a dependent.

As for gifts ... we'll basically be absorbing Nephew into the family, so the cost of his housing, food, etc. will just become part of the general household budget.

Common sense would say that, but remember, this is taxes, not common sense. His expenses constitute gifts, and you have to be aware of gift tax implications.

Phil
Rule Your Retirement Home Fool
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Not sure how it's [the dependency test] relevant yet, but I imagine I'll learn that next April ...

If he qualifies as your dependent, you can claim the education tax benefits. If he doesn't qualify as a dependent, you don't.

That is why his qualifying as a dependent is important to you.

--Peter
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My wife's nephew just got accepted to Indiana University ...
we will be footing the bills for the degree, room and board, insurance, and car. Probably $50,000 all-in....


Btw, congrats on having both the ability and willingness to do this. Your wife's nephew is a lucky duck.
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