Colleges own tuition prepayment plan

[jms2l]

My daughter will be a freshman next year at a private university.

They have a plan where I can prepay up to 8 semesters at the current tuition if I pay by July 1. This isn't a 529, or anything like that, it's just a prepayment. If for whatever reason she withdraws or transfers, they just refund the unused amount in full.

The college does not report anything to the IRS except what they bill each semester.

I have questions about the tax implications. Are there any? There do not appear to be to me.

Tuition inflation has been running about 4% per year, so this seems like the unused balance will effectively return 4% tax-free per year if my daughter does go the expected 4 years in the sense that I would have otherwise had to pay the higher tuition.

Any thoughts?

 

[Phil Marti]

My daughter will be a freshman next year at a private university.

They have a plan where I can prepay up to 8 semesters at the current tuition if I pay by July 1. This isn't a 529, or anything like that, it's just a prepayment. If for whatever reason she withdraws or transfers, they just refund the unused amount in full.

You can claim tax benefits only on the return for the year in which you make the payment. Depending on your income you could be leaving a lot of tax benefit on the table if you paid the maximum in one year.

See Publication 970 for the education-related tax benefits. The American Opportunity Credit is the most generous for undergraduate expenses, but you need to consider your income and tax without the credit.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD

 

[paulthomascpa]

You can claim tax benefits only on the return for the year in which you
make the payment. Depending on your income you could be leaving a lot of
tax benefit on the table if you paid the maximum in one year.

See Publication 970 for the education-related tax benefits. The American
Opportunity Credit is the most generous for undergraduate expenses, but
you need to consider your income and tax without the credit.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD

To me it sounds like a deposit, and no tuition deduction or credits would be
allowed on that payment alone, but based on the tuition paid from that
deposit in each of the years it was withdrawn by the school.

 

[Alan]

To me it sounds like a deposit, and no tuition deduction or credits would be

allowed on that payment alone, but based on the tuition paid from that

deposit in each of the years it was withdrawn by the school.


Paul Thomas, CPA

www.paulthomascpa.com

Watkinsville, Georgia

I agree completely with Paul. Qualified expense occurs when the school debits the account.

 

[Arthur Kamlet]

I agree completely with Paul. Qualified expense occurs when the school
debits the account.

To add: payments of tuition made in 2012 for an acedemic period (term,
semester, quarter, ...) starting not later than March 31, 2013
may be used for QEE - qualified educational expense. Tuition
payments in 2012 for academic periods beginning after March 31,
2013 are not QEE.

 

[Phil Marti]

To me it sounds like a deposit, and no tuition deduction or credits would be
allowed on that payment alone, but based on the tuition paid from that
deposit in each of the years it was withdrawn by the school.

I agree. I sailed past the refundable part.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD

 

[jms2l]

To add: payments of tuition made in 2012 for an acedemic period (term,

semester, quarter, ...) starting not later than March 31, 2013

may be used for QEE - qualified educational expense. Tuition

payments in 2012 for academic periods beginning after March 31,

2013 are not QEE.



--



ArtKamlet at a o l dot c o m Columbus OH K2PZH

So is your opinion that it negates the education credits in later years. I'm confused by your post.

 

[Arthur Kamlet]

So is your opinion that it negates the education credits in later years.
I'm confused by your post.

Sorry, but I do not know how to clear your confusion. Paying tuition etc
in advance cannot benefit you if it's more than three months into
the next year in advance.

 

[Phil Marti]

Sorry, but I do not know how to clear your confusion. Paying tuition etc
in advance cannot benefit you if it's more than three months into
the next year in advance.

That was my initial reaction, but then someone raised the issue that this is more of a deposit than a prepayment. If the student's plans change the entire unused balance is refunded. That was enough for me to switch over to the side that says it's not paid until the institution charges the account, which would allow tax benefits in later years.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD

 

[jms2l]

That was my initial reaction, but then someone raised the issue that this is more of a deposit than a prepayment. If the student's plans change the entire unused balance is refunded. That was enough for me to switch over to the side that says it's not paid until the institution charges the account, which would allow tax benefits in later years.



Phil Marti

VITA/TCE Volunteer

Clarksburg, MD

That's right. The school said that they send out a 1098-T each year for the amount that they withdraw from the "account". Is there any reason these aren't QEE or that I can't still get use the tax credits?

I was more concerned that when they do deduct from the account the difference between the actual future tuition that they charge everybody else, and what gets deducted from my account would be considered income to me. Would the reason that it wouldn't be income because it's a rebate?

 

[Arthur Kamlet]

this is more of a deposit than a prepayment. If the student's plans
change the entire unused balance is refunded. That was enough for me to
switch over to the side that says it's not paid until the institution
charges the account, which would allow tax benefits in later years.

That's right. The school said that they send out a 1098-T each year for
the amount that they withdraw from the "account". Is there any reason
these aren't QEE or that I can't still get use the tax credits?

I was more concerned that when they do deduct from the account the
difference between the actual future tuition that they charge everybody
else, and what gets deducted from my account would be considered income
to me. Would the reason that it wouldn't be income because it's a
rebate?

I have re-read Pub 970. e-read the definition of Qualifying Education
Expenses, and found nothing about deposits and the redemption of
deposits.


To repeat: QEE paid in advance for a term, semester, quarter, etc that
begins not later than March 31 of the year following payment are
permitted. But not via this "deposit" route.

 

[Alan]

I have re-read Pub 970. e-read the definition of Qualifying Education
Expenses, and found nothing about deposits and the redemption of
deposits.


To repeat: QEE paid in advance for a term, semester, quarter, etc that
begins not later than March 31 of the year following payment are
permitted. But not via this "deposit" route.

You have missed the point. The taxpayer is not prepaying qualified
education expense. The taxpayer has contracted with the school to
deposit into his child's account funds to be used for future qualified
educational expense. As the school requires payment they debit the
account for tuition and fees for the applicable semester. At the time
of the debit, the taxpayer has incurred qualified educational expense.

 

[Arthur Kamlet]

You have missed the point. The taxpayer is not prepaying qualified
education expense. The taxpayer has contracted with the school to
deposit into his child's account funds to be used for future qualified
educational expense. As the school requires payment they debit the
account for tuition and fees for the applicable semester. At the time
of the debit, the taxpayer has incurred qualified educational expense.

So does this method work for payments to doctors? To charities? To
the county property tax office?


How do you prove you paid the amount in the indicated year?

 

[Seth]

I was more concerned that when they do deduct from the account the
difference between the actual future tuition that they charge
everybody else, and what gets deducted from my account would be
considered income to me. Would the reason that it wouldn't be income
because it's a rebate?

Buying something (tuition) at a discount isn't income (unless you sell
it for full price).

Seth

 

[Seth]

So does this method work for payments to doctors? To charities? To
the county property tax office?

I'm not aware of any of those that accept _refundable_ deposits for
future payments. (And especially not that fix the price at the time
the deposit is made, the only reason to make the deposit to them and
not to someone who pays interest.)

Seth

 

[W. Baker]

: In article <[email protected]>,

: >I was more concerned that when they do deduct from the account the
: >difference between the actual future tuition that they charge
: >everybody else, and what gets deducted from my account would be
: >considered income to me. Would the reason that it wouldn't be income
: >because it's a rebate?

: Buying something (tuition) at a discount isn't income (unless you sell
: it for full price).

: Seth

I don't know if this has any tax consequences, but I see it as a loan to
the collegs that pays no interest, but does pay by allowing you to use the
loan over time to pay tuitin for the original price, a kind of interest
payment not set in advance.

Wendy Baker

 

[Seth]

I don't know if this has any tax consequences, but I see it as a loan to
the collegs that pays no interest, but does pay by allowing you to use the
loan over time to pay tuitin for the original price, a kind of interest
payment not set in advance.

It's a refundable purchase, not a loan.

Consider: in December, I bought a refundable airline ticket for $500
for flights in February. The following year, the price had increased
to $700. I used the ticket. I don't see where there's any kind of
loan or interest involved, it's just an advance purchase.

Seth