College can be very costly for people who are without scholarships or grants. The annual cost of tuition and books for a student could reach as high as $15250 for public schools and $43990 at a private school. While these are extreme numbers the burden of even smaller four year colleges can hit some pretty big numbers. Student loans for present college students are higher and higher by the year so now more than ever it is important for parents and grandparents to start early in helping kids save for college. There are tax-favored options out there like the 529 accounts and Coverdells. Grandparents can use a special rule to save gift and estate taxes too!
529 Accounts – Payouts used for postsecondary education are tax free. Eligible expenses include the cost of tuition room and board books and supplies for students who are attending college. States impose varying limits on contributions. Many allow pay ins over $100000. And most states let residents take a tax deduction for all or part of contributions made to their state’s 529 plan but write-offs for pay ins to out-of-state plans usually are barred. There are no federal deductions for 529 pay ins.
The account beneficiary can even be changed to a different family member in the event that the child decides to skip college or doesn’t use up all of the funds.
Contributions made to 529 plans are excluded from the donor’s estate in almost all cases. And donors can shelter from gift tax up to $65000 in contributions per beneficiary this year€¦$130000 if their spouses join in. If you give the maximum in 2012 you are treated as making $13000 gifts for this year and the next four years. That limits your ability to make additional gifts to that person in the near future.
Coverdell Education Savings Accounts – As with 529 plans distributions from them are tax free if the funds are used for educational expenses. However there is a $2000 annual contribution cap. Full contributions can be made by marrieds with adjusted gross incomes of $190000 or less or singles with AGIs of up to $95000. But note that if the parents’ AGI is too high to make a contribution the grandparents can make the contribution if their income is below the maximum.
Unlike 529 plans Coverdells can be used to pay the cost of k-12 education including the cost of private or parochial education. You can have both a Coverdell and a 529 for a child. Setting up a Coverdell for a newborn and making annual contribution can provide a tidy sum to defray the cost of elementary or secondary school tuition.
Grandparents have one other tax-saving measure in their arsenal – They can make direct payments of tuition to a school free of gift tax even if the amount of the payment exceeds the $13000 annual gift tax exclusion. And the tuition payment doesn’t count against the lifetime estate tax exemption. This can be a nice present for a grandchild (and for his or her parents as well). In addition these payments reduce the size of the grandparent’s taxable estate.
Lindemeyer CPA a Louisville tax firm can help you understand your tax responsibilities regarding these and other college savings plans. Contact us if you’re interesting in learning more.