Tax Tip of the Week
For the week of August 23, 2004

Consider tax-smart ways to fund your grandchild’s education

Are you a grandparent wanting to fund your grandchild’s education? You’ll find several ways to do this, each with its own limitations and tax consequences.

• Gifts. The simplest is just to make an outright gift of cash to your grandchild each year. In 2004, you can give up to $11,000 without any gift tax liability. If your spouse also wants to join in the gift, you can jointly give each grandchild up to $22,000 each year.
    
• Direct payments to the institution. There’s also a way to give higher amounts and still avoid any gift tax consequences. You can give unlimited amounts if you make the payments directly to a qualified education institution on behalf of your grandchild. But there’s one drawback. The payments can only be for tuition. Payments for dormitory fees, meals and accommodations, or books don’t qualify. You can still give your grandchild an additional $11,000 for these other items though.
    
• Education savings accounts. If you decide against making direct tuition payments, consider making part of your $11,000 gift as contributions to a Coverdell Education Savings Account or a Qualified Tuition Plan (known as a Section 529 plan). These plans and accounts generally offer tax-free growth of college savings. Age, income, and contribution limits may apply, however.

Your grandchild’s total college savings could affect his or her eligibility for scholarships or other tax benefits. That’s why you should coordinate your gifts as part of a comprehensive education plan. Contact our office for help setting up a tax-smart college savings plan.

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