When it comes to gifting money for college, be sure you understand both the tax treatment of your gifts and the effect they have on filing for financial aid. With these factors in mind, we've put together a few possibilities for gifting money for college and saving for your grandchild's education.
Start a 529 college savings plan
A 529 college savings plan can be a safe way to avoid gift tax issues and set aside a sizable amount of money for your grandchild's education. Be sure to note the current annual gift tax exclusion amount. The account's earnings will be tax-free, and withdrawals will not be subject to taxation unless you choose to withdraw the money and use it for something other than qualifying educational expenses. Please note that qualified withdrawals may have a negative impact on the grandchild's ability to obtain financial aid if the grandparent and not the child or parent owns the account. You may also be able to claim your 529 contributions as a deduction on state tax forms, depending on what state you live in.Pay your grandchild's tuition by making payments directly to the college
Direct tuition payments (and tuition payments alone, NOT payments for other educational expenses such as room and board and meal plans) are not considered taxable gifts. However, such payments must be made directly to your grandchild's college or university to be exempt. And while these donations are tax exempt, you should note that, just as with 529 plans, these payments can affect your student's eligibility for future financial aid. Again, if your grandchild is dependent on financial aid to cover their educational expenses, it might be more considerate to divide your gift up over several semesters. If you still prefer to contribute one lump sum, you might consider waiting to do so until their senior year.Assist your grandchild with student loan payments after the fact
As of 2023, you are allowed to gift your grandchild up to $17,000 a year to help pay down his or her loans (or for any reason) without running into any gift tax issues.1 If your grandchild is married, you could also gift their spouse an additional $17,000. Be aware that your lifetime gifts to any one individual cannot exceed $11,580,000 million dollars (as of 2023) without running into gift tax issues.2
If you'd like to learn more about saving for college, or 529 College Savings Plans, there's a wealth of information about college planning available in the Protective Learning Center.
NOTE: As of 2018, the IRS has amended the term “qualified higher education expense” to include a limited amount of annual expenses from a 529 Plan for tuition at an elementary or secondary public, private, or religious school.
Source: www.irs.gov/newsroom/529-plans-questions-and-answers
1. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes#5
2. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Whats-New-Estate-and-Gift-Tax
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