Have you always planned to help your grandchildren pay for college? With the price of college nowadays, college tuition help from grandparents matters more than ever. There are several ways you can help them with college expenses and save on your tax bill at the same time.
Here are three tips to help grandchildren pay for college.
College Tuition Help from Grandparents
1. Write a Check to the Child
Just as in 2011, you can give a grandchild $13,000 in cash a year — or $26,000 if your spouse joins in the gift — without incurring gift tax implications. Write the check and give it to your grandchild. Still have time 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
College tuition help from grandparents can also take the form of appreciated stock or other investments. 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 will probably pay 15 percent capital gains tax rate on the profit. But 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 $1,900 threshold in 2012 (unchanged from 2011), the excess is taxed at the top tax rate of the child’s parents. In other words, a portion of your child’s earnings could be taxed at a rate of up to 35 percent. 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
Tuition can be paid directly to a financial institution with no gift tax implications, under current tax law, but the money cannot pass through the hands of grandchildren (or their parents) first. It has to go right 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 $13,000 in 2012 (unchanged from 2011) to cover those other expenses ($26,000 if your spouse joins in the gift) and not incur any gift tax implications. College tuition help from grandparents: the gift that keeps on giving.