Grand Kids & Tuition
I love having grandchildren. I even love having a grand dog! If I knew I would love having grandchildren this much, I would have bypassed the kid stage. Only kidding, kids.
If you feel like me, you might want to help your grandchildren with college or graduate school. Here are a few smart tax saving strategies:
1Direct contribution: With the annual gift tax exclusion, each grandparent can give up to $15,000 to each grandchild in 2019 gift tax free. A couple can give up to $30,000 to each grandchild gift tax free without even tapping into their life time exclusion of $11.4 million per person.
However, the downside is that if you pay tuition directly or give money to your grand kids, the money will impact financial aid. Cash support can reduce eligibility for aid by as much as half of the amount given. Remember, no good deed goes unpunished.
Sandy’s hot tip: However, if you wait until after the student’s sophomore year or junior year if in a five year program, the money won’t impact financial aid because the FASFA form (financial aid form) only assesses income from the prior two years..
2Contribute to a Qualified Tuition plan such as a section 529 plan. There are two types of qualified tuition plans. The first is a prepaid tuition plan started by some states for state university tuition and required fees. The second type of plan, known as a section 529 plan, allows for contributions to an account that can be used for any tuition, required fees, room, board and even internet charges for any school such as private school or graduate school. The funds are tax free when used for qualified educational expenses. The only minor drawback is that funds in a section 529 plan are treated as a parent asset for purposes of the FASFA but only have a maximum impact of 5.64% of the plan assets. Thus, you get great benefits from these plans with very little downside and cost.
Key tip: The key is to make sure that the section 529 plan is owned by the parent or the student and not the grandparent or it could negatively impact financial aid of the grandchild.
3Paying off student loan debt: You can’t pay student loan debt directly, but you could always gift money to cover the debt of your grandchildren. Again, because the FASFA has a two year lookback, grandparents should wait until after the grandchild’s sophomore year. or even after the grandchild graduates.
Note: Pending legislation would allow Section 529 money to be used to repay up to $10,000 in student loan debt per borrower. for now, however, money in a grandchild’s 529 plan used to pay off student loans would be considered a non qualified distribution that could result in taxes and penalties on the earnings.
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