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MBA Financing Through Parents - Minimizing Tax Impact

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MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 07:26
In anticipation of being admitted to a US MBA program this year, I’m trying to find the most suitable way to pay for my MBA education while minimizing any tax impacts and not upsetting the IRS 

Basically, I am very fortunate and will be financing my MBA through a combination of my own savings and my parents savings (which I’ll probably have to pay back).

My parents funds are located in US bank accounts as well as overseas bank accounts. What is the easiest method for them to pay for my tuition or loan me money for general use? I assume if they give me money, they will be subject to a gift tax after then initial $10k.

Thank you.
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Re: MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 07:40
Are you asking if your parents help you pay for the MBA, what are your tax consequences with the federal gov't?

If it's a loan, it's not gross income - therefore not taxable.
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Re: MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 08:19
nink wrote:
Are you asking if your parents help you pay for the MBA, what are your tax consequences with the federal gov't?

If it's a loan, it's not gross income - therefore not taxable.


but from the gov perspective, how does a 'gift' of $50k differentiate from a 'loan' of $50k? I'm not signing any formal paperwork with my parents/family or anything
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Re: MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 08:57
If your parents make a gift to you, they can each make tax free gift of $13k each (unless they lowered it back to $10k). So that's $26k in total from both of your parents tax free. Anything above that, they have to pay gift tax unless they want to use against unified credit for gift and estate tax. Whenever they make a gift to you, they have to fill out a form and attach to their tax return. That's how IRS will know it's a gift.

If you really want to do this (although I don't think it's necessary) bullet-proof, prepare a promissory note and have your parents sign it. Get it notarized or something. That's a proof IRS will accept.
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Re: MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 09:49
I'm not sure if this was done away with, but there was a $ 1 million lifetime gift tax limit (in addition to the 13,000/year limit). So, they could give you up to $1 million if that law hasn't expired.

I do remember something about 2010 though. So maybe that has passed.
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Re: MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 09:59
can't your parents just pay the school directly?
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Re: MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 10:01
Be wary of the advice you are receiving here with regards to a loan. My understanding is if they plan to give it to you as a loan, it'll need to be in writing, of course, but they'll also need to charge you a fair market interest rate AND then they'll be taxed upon the imputed income from that.

HOWEVER, if they pay your expenses directly (and I don't know what exactly qualifies as directly), I think they can qualify for a gift tax exclusion for education.

http://www.associatedcontent.com/articl ... ation.html

That only counts for tuition, I believe, but I think there are other exemptions for health and maintenance.
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Re: MBA Financing Through Parents - Minimizing Tax Impact [#permalink] New post 24 Mar 2011, 10:22
upInTheAir wrote:
can't your parents just pay the school directly?


Don't remember if that applies to grad school. I think most parents set up 529 plan for such purpose.

mreevit wrote:
I'm not sure if this was done away with, but there was a $ 1 million lifetime gift tax limit (in addition to the 13,000/year limit). So, they could give you up to $1 million if that law hasn't expired.


That's part of the unified credit for gift and estate tax. 2010 thing is that they simply reduced the limit after 2010 (was the plan). But I think they created new exemption of $5 million for 2011. I think it used to be total of $3.5 million or so.

ProfessionalKazooist wrote:
they'll also need to charge you a fair market interest rate AND then they'll be taxed upon the imputed income from that.

Yes. Interest has to be charged to make it a legitimate loan.

Best way to do this (and this depends on the state), find out if your state lets you use 529 plan for grad school. Ask your parents to set it up. They can contribute up to 5 times the allowable gift exclusion amount. So assuming it is still $13,000 a yr, each of your parent can contribute $65,000 each ($130,000 total) in one yr. But your parents have to report a pro-rated portion of their contribution each year for up to 5 years. Second, they can't make any additional gifts to you until the pro-rated period is completed.
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Re: MBA Financing Through Parents - Minimizing Tax Impact   [#permalink] 24 Mar 2011, 10:22
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