Can I claim my son as a dependent if his aunt pays his tuition?

My son starts college this fall. His great-aunt has set aside monies for her 4 great-nieces and great-nephews for their college educations. If she pays the tuition, how does that affect my claiming my son as a dependent if tuition exceeds 50% of support?

First off, this is one of the best ways to give money to a younger generation and avoid taxes. Pay for their education! Way to go, great-aunt!

As always, the best place to start when answering a question like this is the good book, J. K. Lasser's Your Income Tax. As you mention in your question, to claim someone as a dependent, you must provide over 50% of his or her support. What is support? Well, Section 21.7 of Your Income Tax gives a list, and, unfortunately, bullet point number four says, "Education expenses such as tuition, books, and supplies." So, if great-aunt's payments exceed 50% of all support for Junior, then you can't claim him as a dependent. Alas, what to do?

One slick way to go may be to have great-aunt give you part of the money allocated each year and have you pay. Great-aunt can give up to the annual gift exclusion amount to you and your wife tax free. By doing so, then you can pay for school out of your pocket (sort of) and claim Junior as a dependent. Not bad, eh?