College tuitions can break the bank of most families. The 2014-2015 average moderate college budget for an in-state public college averaged $23,410, and $46,272 for private colleges, according to collegedata.com. Grandparents who want to help offset tuition costs can quickly run up on or exceed the $14,000 per person ($28,000 per couple) gift tax exclusion. If the gift exceeds the annual exclusion, then a gift tax is assessed or there is a reduction in the unified estate and tax credit.
Finding tax-free options for giving preserves wealth, and there’s a pretty simple solution for providing tuition assistance. Grandparents may pay tuition directly to the school tax-free, and may also qualify for the American Opportunity Tax Credit (AOTC) in the process. There is no limit on the amount of annual gifts when you pay the college directly, and the amount doesn’t count toward the unified estate and gift tax credit.
Another option is setting up a 529 plan for college expenses. Grandparents can make five years’ worth of gifts at one time (up to $70,000). Because grandparents control the plan, it can’t be tapped for other purposes. The money grows tax-free, with no tax on the withdrawals for qualified college education expenses. When contributing to a 529 plan, you can opt to average the contribution over a five-year period to avoid gift-tax consequences.
Medical expenses can also create significant strain on family finances, and families who wish to help can also pay medical expenses directly to the health provider for a tax-free benefit. Like paying an educational institution, there isn’t a limit on the amount you can gift when you pay directly.
When you have questions about topics that affect you, your company, or organization taxes, a quick search on our Salmon Sims Thomas resource archives may give you some answers. We recently wrote about How to Avoid a Gift Tax, and you may also be interested in 6 Ways for Grandparents to Pay It Forward.
Please contact us for additional advice about increasing wealth and decreasing taxes.