Hi, I am working on H1B visa since '10. My sister came to the US end of year '11 to start school from Spring semester (Jan'12). I paid approx. $40000 for her tuition and another approx. $6-8K towards living expenses for her during 2012.
She earned around $5K during the year (pre-tax) while working part-time during summer and fall semesters (all while complying with F1 visa rules and regulations on working on-campus)

My question, and I am desparately looking for some help to wrap my head around it, is:

1. Can I claim her as a dependent on my taxes? She is 22 yrs old and went to grad school in DC while I live in Chicago. She did not have a break from school (on-campus internship required during summer).

2. My AGI is less than $80K (I read this as the llimit some where I think). Can I take any deductions for the tuition/expenses I paid for my sisters' education?

3. I file form 1040 for my taxes, being a resident alien. My sister can file either 1040NR or 1040 (since she'll pass the substantial stay test during 2012). Does it matter which form she would have to fill for me to take her tuition & expense deductions on my taxes?

4. She'll be starting a new job in Jan'13 (her's was an accelerated 1 yr MS program) and will be on OPT next year. If she files 1040 for her taxes in 2012, will this mean she'll have to pay FICA/Social Security taxes in 2013 despite being on OPT? I remember not paying FICA/Social Security while on OPT for a few months for myself, but I had filed 1040NR in the year before that, so I am not sure about form 1040.

Breakdown of tuition: Received around $20000 from India (which I had sent from US from my income in last year for this specific purpose, so that it can earn some interest instead of sitting here at 0.02% in my savings account).
Other than that, I paid close to $20000 from my own account here.
I've also been paying ~600/700 each month for her living expenses & set her up with an initial couple of thousand for the same purpose. Totalling about $8K conservatively. Also, I file as a single and did not attend any school in 2012 myself.

What are my options with respect to, claiming her as a dependent, her filing for 1040NR/1040, deducting her tuition/expenses, any college tax credits she/I might be eligible for, and repurcussions of this years' taxes (her as dependent) on her next year's OPT taxes FICA/SS.

I'd greatly appreciate any help on this. Thanks in advance!

1. You can't claim her as a dependent because to do so she must be a US citizen, resident alien, US national, or resident of Canada or Mexico. If she is here on F-1 (no green card) then you cannot claim her as a dependent on your US income taxes.

2. Tuition expense credits are available only for expenses incurred in supporting yourself, your spouse, or a dependent - so no.

3) Since you can't claim her as a dependent, this is moot.

4) Sorry, I am not familiar with how this works, so hopefully someone else can answer this question.

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Originally Posted by ebaines

1. You can't claim her as a dependent because to do so she must be a US citizen, resident alien, US national, or resident of Canada or Mexico. If she is here on F-1 (no green card) then you cannot claim her as a dependent on your US income taxes.

2. Tuition expense credits are available only for expenses incurred in supporting yourself, your spouse, or a dependent - so no.

3) Since you can't claim her as a dependent, this is moot.

4) Sorry, I am not familiar with how this works, so hopefully someone else can answer this question.

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Thanks for the reply, I really appreciate it. My sister will be a Resident Alien, despite being on F1 student visa based on the substantial presence test as on IRS website
Substantial Presence Test

My understanding if that since she spent more than 183 days in US, she would be qualified under Resident Alien Category. Does that impact your answers to the questions above?

Also, if I can't claim her as a dependent, can I use the tuition I paid for her as a gift? Would this be taxed for me and for her?

Thanks again.

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Originally Posted by yashsharma91

My sister will be a Resident Alien, despite being on F1 student visa based on the substantial presence test as on IRS website
Substantial Presence Test

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Her time in the US while on an F visa can't be counted as days for the substantial presence test - see the "exempt individual" section of the web page you referenced. So no, she does not qualify as a resident alien.

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Originally Posted by ebaines

Her time in the US while on an F visa can't be counted as days for the substantial presence test - see the "exempt individual" section of the web page you referenced. So no, she does not qualify as a resident alien.

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Gotcha! That makes sense, I overlooked that section. What about using the tuition expenses as a gift deduction? Are there any limits assigned to that?
I read somewhere, the annual limit for tax free gift is $13000, whereas I paid close to $20000 in tuition (from this years salary, rem. $20K came from last years gift used this year)
I also read elsewhere, that the gifts for tuition, paid directly to the educational instituition are always exempt from gift-tax.
Do I have any options of reducing my taxes or AGI for the tuition gift to my sister?
If I do so and the limit for tax-free gift is only $13000 (instead of full tuition gift being tax-free), how do I calculate the tax I'll owe on the remaining $7000?

Thanks!

Gifts to family CANNOT be deducted as a charitable gift.

Sorry, but there is no legal way to deduct the tuition on your tax return.

Regarding gift taxes: you have no worries there - tuition payments are specifically exempt from the gift tax. The only trick here is that the tuition payment must be paid directly to the school - in other words if you write out your check for tuition or expenses payable to the school there is no gift tax issue, but if you make it out to your sister and she in turn pays the tuition then it is considered a gift by you to her, and gift taxes may be an issue. In general if you make gifts to a single person in excess of $13K in a single calendar year you must file the gift tax form, but no gift taxes are actually due unless the total of all such gifts made in your lifetime and documented on all the gift tax returns for all years exceeds $1 million.

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Originally Posted by ebaines

Regarding gift taxes: you have no worries there - tuition payments are specifically exempt from the gift tax. The only trick here is that the tuition payment must be paid directly to the school - in other words if you write out your check for tuition or expenses payable to the school there is no gift tax issue, but if you make it out to your sister and she in turn pays the tuition then it is considered a gift by you to her, and gift taxes may be an issue. In general if you make gifts to a single person in excess of $13K in a single calendar year you must file the gift tax form, but no gift taxes are actually due unless the total of all such gifts made in your lifetime and documented on all the gift tax returns for all years exceeds $1 million.

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Great! Some hope there!
Yes, I paid the school/university directly for my sister's student account through electronic checks and auto withdrawals for the 2nd semester. Total is around $40000. I don't foresee paying any more of these tuition gifts in my future, unless I start paying for myself (starting B-school but that wouldn't be a gift, since its for myself) or my kids, which I don't plan on having at least for the next 10 yrs of my life.
Does it mean I can reduce my AGI by the entire $40000 amount? Or is there a certain portion of it that I can use for adjusting my AGI? Any maximum adjustment I am limited to, in this scenario?
Are there any repurcussions of filing a gift tax return? As in, would this change my tax brackets etc for next year, would I have to continue filing a gift tax form each year, etc? Thanks again.

@ AtlantataxExpert: Thanks for the reply. These were tuition payments for my sister that I don't expect to be paid back for. Not charitable by nature and were paid directly to the university. I am not sure if that changes how these are being looked at. I make charitable donations each year to my Alma Mater Virginia Tech, but don't take deductions for it, since that's a very small amount compared to what I paid for my sister. Isn't there a distinction between the two kinds of "gifts"?

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Originally Posted by yashsharma91

Does it mean I can reduce my AGI by the entire $40000 amount?

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NO! Neither gifts to individuals nor payment of tuition are deductible. As AtlantaTaxExpert said - "there is no legal way to deduct the tuition on your tax return."

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Originally Posted by yashsharma91

Are there any repurcussions of filing a gift tax return? As in, would this change my tax brackets etc for next year, would I have to continue filing a gift tax form each year, etc?

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There are no immediate repurcussions. Gift tax has nothing to do with income tax, so no, there is no impact there. The only repurcussion is that the amount reported as gifts in excess of the annual $13K exclusion is deducted from the amount of your estate that can be excluded from estate taxes after you die. The idea here is that you can't get out of paying estate taxes by giving away all your assets to family members. And no - if you file a gift tax form one year it does not obligate you to file one every year.

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Originally Posted by yashsharma91

I make charitable donations each year to my Alma Mater Virginia Tech, but dont take deductions for it, since thats a very small amount compared to what I paid for my sister. Isnt there a distinction between the two kinds of "gifts"?

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Charitable gifts (i.e. gifts you make to a recognized 501(c)(3) charity, such as a school, church, hospital, United Way, Red Cross etc) are deductible to the extent that you do not receive any goods or services in exchange. Hence paying tuition is not considered to be a charitable gift to the school, as your sister receives services in exchange (her schooling), so tuition payments are not deductible. Your annual fund gift to Virginia Tech IS deductible, because it is truly a gift with no direct benefits expected back to you. Gifts you make to individuals like your sister or to organizations that are not 501(c)(3) organizations - such as a social club - are considered personal gifts and are not deductible.

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Originally Posted by ebaines

NO! Neither gifts to individuals nor payment of tuition are deductible. As AtlantaTaxExpert said - "there is no legal way to deduct the tuition on your tax return."



There are no immediate repurcussions. Gift tax has nothing to do with income tax, so no, there is no impact there. The only repurcussion is that the amount reported as gifts in excess of the annual $13K exclusion is deducted from the amount of your estate that can be excluded from estate taxes after you die. The idea here is that you can't get out of paying estate taxes by giving away all your assets to family members. And no - if you file a gift tax form one year it does not obligate you to file one every year.



Charitable gifts (i.e. gifts you make to a recognized 501(c)(3) charity, such as a school, church, hospital, United Way, Red Cross etc) are deductible. Gifts you make to individuals like your sister or to organizations that are not 501(c)(3) organizations - such as a social club - are not deductible.

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So, does it mean I can't claim the tuition payment as a deduction on the taxes, but I am exempt from paying taxes on these payments since they were tuition gifts? So no one gets any tax benefits but I would have to pay EXTRA taxes for paying for my sister's tuition..? Am I understanding this correctly?

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Originally Posted by yashsharma91

So, does it mean I can't claim the tuition payment as a deduction on the taxes,

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Correct - the tuition payment is not reported on your income tax return in any way.

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Originally Posted by yashsharma91

but I am exempt from paying taxes on these payments since they were tuition gifts?

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In the US we pay taxes on income, not espenses. So just as there are no tax implications when you spend money to you buy a loaf of bread, there are also no tax implications when you spend money to buy education for your sister (although there are tax credits available to help offset tuition expenses made on behalf of a dependent, but we've already exhausted that possibility).

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Originally Posted by yashsharma91

So no one gets any tax benefits but I would have to pay EXTRA taxes for paying for my sister's tuition...??? Am I understanding this correctly?

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Not quite - there are no tax benefits but also there are no extra taxes you have to pay, just as there are no extra taxes when you buy a loaf of bread. Again - these tuition payments have no effect whatsoever on your income taxes.