Every December my house gets filled with plastic toys and ridiculous trendy dolls. Majority of these toys keep my kids attention for all of 6 days. Then my wife buys another expensive basket to pile them into. I would guess 70% of these useless objects are purchased by the Grandparents. Let’s do everyone a favor and give these loving grandparents some guidance and tax advice this year.
Helping to pay for a grandchild's college education can bring great personal satisfaction and is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. In addition to this, they might just get a State Income Tax deduction for themselves.
So what are the best ways to accomplish this goal?
529 plans!
A 529 plan can be an excellent way for grandparents to contribute to a grandchild's college education, while simultaneously paring down their own estate. Contributions to a 529 plan grow tax deferred, and withdrawals used for the beneficiary's qualified education expenses are completely tax free at the federal level (and at the state level too). Grandparents can open a 529 account and name a grandchild as beneficiary (only one person can be listed as account owner, though), or they can contribute to an existing 529 account. Grandparents can contribute a lump sum to a grandchild's 529 account, or they can contribute smaller, regular amounts.
Income Tax Deduction for the Grandparents
In many cases, depending on the resident state of the grandparents, they can receive a state income tax deduction for the year the gift was made. The following States offer a state tax deduction for 529 Plan contributions;(NY,CT,AZ,AR,CO,CT,DC,GA,ID,IL,IN,IA,KS,LA,ME,MD,MI,MS,MO,MT,NE,NM,NC,ND,OH,OK,OR,PA,RI,SC,UT,VT,VA,WV,WI) If the parents live in one of these states, they must use the state endorsed plan to receive the state tax deduction or credits. A great resource for determining state and plan eligibility is www.savingforcollege.com.
If the grandparents gift the money directly to the grandchild, he or she might spend it on something other than college. Or, even worse the parents might dip into that account when the family budget gets tight. Another attractive feature of 529 plans is that under current law, grandparent-owned 529 accounts are excluded by the federal government's financial aid formula--only parent-owned 529 plans count. So a grandparent-owned 529 plan won't impact a grandchild's chances of qualifying for federal aid.
Did you know...
- • If your grandchild doesn't go to college or gets a scholarship, you can name another grandchild as beneficiary with no penalty
- • A recent survey of grandparents revealed that over half were--or planned on--contributing to their grandchildren's college education(Source: Financial Research Corporation)
Let’s face it, the Grandparents will still get them the Plastic Toys and Trendy Dolls….and unfortunately another couple expensive basket will probably find an open corner in my house. And Yes, I realize from the children’s perspective, getting a 529 Plan contribution for Christmas is like getting a stocking full of coal…..but when they are 18 and headed off to college for intense matriculation (beer drinking) they will appreciate the thoughtfulness.
Ossining resident Michael Salmon is a Senior Financial Advisor with Ameriprise Financial in Midtown Manhattan. Michael Specializes in Financial Planning,Investment Portfolio Management, Retirement Planning Strategies, Estate Planning Strategies,Saving for Education Michael is an active public speaker and financial columnist. You can reach Michael at (646) 964-9470 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
