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socrateaser, Lawyer
Category: Tax
Satisfied Customers: 38567
Experience:  Retired (mostly)
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My employer paid around $11,000 directly to my daughters college

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My employer paid around $11,000 directly to my daughter's college towards her tuition in 2012. This amount was not included in my wages. Can I count this $11,000 as a qualified educational expense in order to receive the American Opportunity Credit? In other words, can it count as a third party gift since it was my employer and not hers and since it was paid directly to the school?

Under federal case law (Commissioner v. Duberstein, 363 U.S. 278 (1960)), whether or not a gift is taxable income or a nontaxable gift, depends solely on the intent of the donor. If your employer made the payment out of "affection, respect, admiration, charity or like impulses," id. at 285, then the payment could be a gift to you, but paid to your daughter at your request, and as such, it would be your tax credit to do with as you wish.

But, you could be opening a "can of worms," here -- because of the things that the IRS doesn't like to approve, gifts from employers is on the top of the list.

Hope this helps.
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Customer: replied 3 years ago.

My employer paid the tuition because it is a common benefit for employees where I work (a university). They pay a portion of tuition for employees, spouses and children at certain universities. I realize if they were paying my own tuition it would be tax-free educational assistance and would not qualify towards a tax credit. I just can't find a clear answer in regards XXXXX XXXXX fact that they paid it on my daughter's behalf and not mine.... since she is not their employee.

Okay, my apologies -- apparently there is a specific tax code section concerning this issue.

Under IRC 117(d), educational institutions offering a full reduction of tuition charges to employees, their spouses and dependent children for undergraduate coursework may exclude the value of this education from their employees’ taxable wages.

So, that answers the question about the taxability of the remitted tuition costs.

The American Opportunity Tax Credit is found in IRC 25A. Subsection (g)(2)(A) expressly provides that the credit must be reduced by "a qualified scholarship which is excludable from gross income under section 117."

Therefore, the Code is clear on this issue (which is remarkable in itself). You cannot use the credit.

Hope this helps.