Question

If my daughter is living in an off-campus home I own, can I charge her rent, and make a 529 deduction for room and board?

Forum|Forum|7 years ago
June 4, 2019
6 replies
0 views

The community college doesn't provide housing, but does have a room & Board COA of almost $10K

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SweetieJean

Employee

You would have to claim this rent as income on your own return.

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ncbaronesAuthor

If I claimed this rent on my income tax, I would also be able to claim deductions as a Landlord, so you would have to play it all the way out to determine if this was advantageous or not. I understand the part about not being able to claim my daughter as a dependent if she were "paying rent", (but then, she would have HUGE advantages in terms of Financial Aid). We purchased a Townhome for her to live in while in school because it was less than an apartment. I'm just trying to figure out how a student, (or as a parent of a student, me), paying rent to an apartment, is different than paying for a mortgage. It seems a living expense borne by the parent to provide board for a student, either way.

Carl11_2

Employee

Not so fast. When renting to a relative, you lose out on a lot.
- Your claimed rental expenses allowed can not exceed the taxable rental income.
- Excess expense carryovers to the next year are not allowed. They're just lost, forever.
Those two alone can cost you dearly down the road when sell or otherwise dispose of the property. Also, when you put money in that 529 it was not tax deductible (on your federal return) when you contributed it. You paid tax on that money. Now when you claim that money as rental income, you will pay tax on it "again". While it's taxability may be offset by the deductibility of mortgage interest and depreciation, you will still pay tax on it when you sell the property later, since you are required to recapture depreciation in the year your sell/dispose of the property, and pay tax on it then.
The IRS has had these loopholes figured out for decades now, and they've basically been closed for just as long. But the bottom line is, you're going to do what you're going to do.

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ncbaronesAuthor

In that case, I vote for Tax Reform. I'm going to do what is legal, just trying to find out what that is.

Carl11_2

Employee

No. If you do that, then you will risk not being able to claim your daughter as a dependent on your tax return, and you will not be able to claim the education benefits. But remember the "board" side of room & board. 529 money can be used to pay for that too. (basically, her three meals a day). However, make sure your claim is reasonable. You may find it difficult to convince the IRS that a college student is having a $30 meal 3 times a day.

Best thing to do is to only withdraw from the 529 an amount that you can "prove" you used "that" money for. Remember, 529 funds can be used for tuition, books, lab fees, room *and* board - which is basically 3 meals a day, 7 days a week if they are living a significant distance from their tax home.

Besides, your way doesn't make sense. What you deduct on the education side, is just taxed on the rental income side. You're creating additional book keeping and paperwork for absolutely no gain to anyone.

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SweetieJean

Employee

<a rel="nofollow" target="_blank" href="https://stevebrownapts.com/blog/529-plan-qualified-expenses-using-529-pay-off-campus-rent/">https://stevebrownapts.com/blog/529-plan-qualified-expenses-using-529-pay-off-campus-rent/</a>

Carl11_2

Employee

As a parent of a college student, you should find the below information useful.

College Education Expenses

Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:

- Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*

- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”. The first one indicates a choice. The second one provides no choice.

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents will claim the student as a dependent on the parent's tax return and:

The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

The parents will claim all educational tax credits that qualify.

If the student will be filing a tax return and:

The parents qualify to claim the student as a dependent, then:

The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.

If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.

1099-Q Funds

First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred as follows depending on what type of 1040 you’re riling.

1040-EZ excess scholarship income is included on line 1.
1040-A excess scholarship is included on line 7.
1040 Excess scholarhip is included on line 7.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred as indicated above with one exception. For the 1040 excess ESA/QTP funds get transferred to line 21 with the annotation “SCH” next to it.

Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.