Tax Benefits for Grandchildren
If you are a grandparent, there are several things you can do to teach your grandchildren financial responsibility and set aside money for their future education and retirement. Before we get into actual suggestions, you must understand the gift tax rules. You can give anyone, every year, an amount up to the annual gift tax exclusion. The gift tax exclusion is inflation-adjusted and is currently $17,000, which means that, in 2023, you can give any number of recipients up to $17,000. Thus, you can give each grandchild $ 17,000 per year; if you are married, you and your spouse can each give $17,000 for a total of $34,000 per year. Gifts in excess of $17,000 per donee can certainly be made, but doing so will mean the grandparent must file a Gift Tax Return (Form 709) and pay gift tax on taxable gifts in excess of a lifetime gift and estate tax exclusion of $12.92 Million for 2023).
Of course, just handing out money to your grandchildren will not teach financial responsibility or meet specific goals you might have in mind for the money. The following are some suggestions.
Savings for College: The tax code allows taxpayers to put away large amounts of money limited only by the contributor’s gift tax concerns and the contribution limits of the intended state plan. These plans have no income or age limitations, often referred to as Sec. 529 Plans (the tax code number) or Qualified Tuition Plans. The maximum amount – per beneficiary – that can be contributed is based on the projected cost of a college education and will vary among state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. These plans allow for tax-free accumulation, provided the funds are used for qualified college expenses. Thus, a grandparent can contribute up to $17,000 per year to a Sec. 529 Plan. Special provisions permit 5 years’ worth of contributions up front (this requires filing gift tax returns).
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Savings for Education: Funds from a Sec. 529 plan can only be used for college. Coverdell Education Accounts also provide tax-free accumulation like Sec. 529 plans, but unlike Sec. 529 Plans, the funds can be used for education beginning with kindergarten and continuing through college. So, you might want to consider contributing the first $2,000 (Coverdell annual contribution limit) to a Coverdell account. One downside to a Coverdell account is that it becomes the child’s account to do with as the child wishes when the child reaches the age of majority (age varies by state), while, with the Sec. 529 plan, the contributor maintains control of the plan’s distributions.