When your parents pay your college expenses, it doesn't count as taxable income -- gifts never do. That's true even if you're too old to be claimed as a dependent. Usually, your parents won't owe the IRS any money either. They may even be able to write off some of the cost on their 1040.
Tuition and the IRS
As of 2012, the IRS requires your parents to report an annual gift if either of them gives you more than $13,000. If it's a joint parental gift, the limit is $26,000. Gifts of this size are typically subject either to gift tax or to your parents' lifetime unified credit. Tuition, however, gets its own separate exclusion from gift tax and the unified credit. Your parents can pay any amount of tuition without paying tax on it, and they still have the option to give you $26,000 for something else. The same rules apply to grandparents, aunts, family friends or anyone else who pays your tuition.
The tuition exclusion doesn't covers books, board and other expenses. Your parents, however, can give you up to $26,000 each year without worrying about reporting it to the IRS. They can contribute $26,000 to your sister's college expenses too without any trouble -- the annual exclusion applies to each gift recipient. If your parents do give you more than the limit, they can choose to pay gift tax, of they count the excess off against the unified credit, which lets each of them make more than $5 million in gifts in their lifetime without facing the gift tax.
If your parents still claim you as a dependent, they can actually get a tax deduction of up to $4,000 for paying your college bills. It doesn't apply to room or board but does include mandatory fees the college imposes -- and they can take the write-off even if they don't itemize deductions. Neither parent can claim the write-off, however, if your parents file married-but-separate returns. If they file a joint return, they lose the deduction if their adjusted gross income is greater than $160,000.
If your parents want the tuition deduction, they file Form 8917 with their tax return and report the expense on the front of the 1040. If they don't qualify for the deduction, they don't have to file, nor must they report anything if they've made tuition payments, because these are exempt from gift tax. If they give you other support that exceeds the gift tax exclusion, they have to file Form 709.
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