Dear Dr. Don, I am making payments on a Parent Plus loan that is under my mother's name. Unfortunately, I will be the only one continuing to pay for this loan. Since the loan is under my mother's name, I am unable to deduct it on my taxes. Still, I'm wondering if she would be able to claim the payments I make. If so, how, and how much can I get back in return?
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Thank you for your time and help, -- Maureen Muster
Dear Maureen, Your letter is a refreshing change from the typical reader writing in to complain that the student isn't making his loan payments, leaving that responsibility to his co-signer parents.
Making your mother's loan payments constitutes a financial gift to her. To the extent that the amount is less than the annual exclusion for the gift tax -- $14,000 for the 2013 tax year -- there are no gift-tax implications. Above that amount, you would need to file a gift-tax return, but you could use your lifetime credit to avoid paying the gift tax. If you're married, you and your husband could choose to split gifts and gift your mother $28,000, but both of you would have to file a gift-tax return and elect to split gifts.
Your mother's ability to claim the deduction for the student loan interest would depend on her income level, what the loan proceeds were used for and whether you were a dependent when the loan was taken out. The Internal Revenue Service website has an interactive work sheet that will walk her, or anyone else, through the deductibility of student loan interest.
It sounds as if you want her to reimburse or gift you the value of any tax deduction she gets on your loan. That seems like a fair trade. She should be able to learn the value of the deduction by looking at her tax returns and then inform you of it.