How can I provide tax-free contributions to my kid's student loans?
I recently read that parents can make tax-free contributions to their children's student loans, if the parent is a co-signer. Is this true and if so, how is this accomplished?
When paying your kid's student loans, two tax aspects come to mind. First, is the gift of student loan repayment tax-free? Most likely.
Here's why. Any gifts within the annual gift tax exclusion (which is $14,000 in 2017) are not taxable. If you're married, each spouse may give your kid up to $14,000 a year, for a total of $28,000, without having to pay tax or file a gift tax return. If the gifts exceed this annual gift tax exclusion, you'd have to file a gift tax return (IRS form 709), but you won't have to pay taxes until you exceed your lifetime estate and gift tax exclusion. For 2017, that exclusion is $5.49 million per individual! Furthermore, if you co-signed, your repayments may not be considered gifts at all. Discuss your specific situation with your tax preparer.
Second, do you get to deduct student loan interest if you made the loan payments? Only if you co-signed. As always with tax, the devil is in the details, so go over them with your tax preparer or review IRS Publication 970 (Student Loan Interest Deduction).