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Plan Ahead
to Shape the Future |
If you want to help your grandchildren through college, there are several options to help pay their expenses and trim your family's tax bill at the same time. Here are three tax-wise tips to get the maximum bang out of your education buck:
The tax law lets you give a grandchild $12,000 in cash a year ($24,000 if your spouse joins in the gift) without incurring gift tax implications. Just write out checks and give them to your grandchildren. If they still have a few years before college, set up a custodial account at a bank, mutual
fund or brokerage firm. The money can be used for tuition or other college-related expenses.
If you give appreciated stock or other investments to your college-bound grandkids, your family can potentially cut the capital gains tax bill. Let's say you want to sell stock you've owned two years to free up some cash for tuition. You will probably pay a 15 percent capital gains tax rate on the profit. But you can give a certain amount to your grandkids at a lower tax rate.
Keep in mind that if your child is under age 19, or age 24 if a full-time student, the Kiddie Tax rules may apply.
If a child affected by the Kiddie Tax rules receives "unearned income" above an $1,800 threshold in 2008, the excess is taxed at the top tax rate of the child's parents. In other words, a portion of your child‘s earnings could be taxed at a rate as high as 35 percent. If the threshold is not exceeded, the Kiddie Tax doesn't apply for that year. If it is exceeded, only unearned income in excess of the threshold gets taxed at the parents' higher rates.
Under current tax law, tuition costs can be paid directly to a college with no gift tax implications. The catch is the money cannot pass through the hands of grandchildren (or their parents) first. It must go directly from your account to the university. This might be appealing if you're worried about the youngsters spending it frivolously.
This tax break applies only to tuition and can't be used to pay room, board and other college expenses. However, you and your spouse can still each give your grandchild a tax-free cash gift of up to $12,000 to cover those other expenses.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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