Tax-Advantaged Ways to Help Educate the Grandchildren
on Wed, Feb 22, 2017
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 ideas:
1. Write a Check to the Child
In 2017, you can give a grandchild $14,000 in cash a year — or $28,000 if your spouse joins in the gift — without incurring gift tax implications (unchanged from 2016).
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.
2. Give Stock
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 may pay up to 20% capital gains tax rate on the profit. The 20% rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
However, 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 a $2,100 threshold in 2017 (unchanged from 2016), the excess is taxed at the top tax rate of the child's parents, rather than at the child's rate which is generally much lower. 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.
3. Pay Tuition Yourself
Under tax law, tuition can be paid directly to a financial institution 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 approach 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 can still give your grandchild a cash gift of up to $14,000 (or $28,000 if your spouse joins in the gift) to cover those other expenses and not incur any gift tax implications.