Don’t look a gift horse in the mouth (Part II)

I talked about gift tax returns in Part I of this blog (a long time ago, I know, but one thing leads to another and you are a month behind). Back to business…Sometimes a gift doesn’t look exactly like a gift. Gifts don’t have to come with a shiny bow to be a gift for gift tax purposes. The one that catches a lot of people by surprise is money put into 529 plans to save for educational expenses.

By now, most everyone has heard of Qualified Tuition Programs (also know as 529 plans for the Internal Revenue Code Section it is referenced in) which are used to save for college expenses. The earnings in these accounts accumulate tax free and the beneficiary (student) does not have to pay tax on the distribution. These plans are a favorite for grandparents who want to help with future college expenses.

But money put into a 529 plan is a gift for gift tax purposes and is not eligible for the educational exclusion. The educational exclusion is for payments made directly to the school for tuition. It doesn’t include amounts paid for books, housing, etc – just tuition. This is a great way to make a gift but not have any gift tax consequences.

Although money put into a 529 plan does not qualify as this type of gift, it does have some special benefits. Remember that you can give up to $13,000 per person annually without gift tax consequences. With a 529 plan gift, you can elect to treat up to $65,000 put into the plan in one year as made over 5 years. You will have to file a gift tax return in the first year to make the election. As long as you don’t give that person any additional gifts in the next four years, you do not have to file a gift tax return. To say it another way, once you’ve made this election, you’ve used up your annual gift tax exclusion for five years and cannot give any additional amount without filing a gift tax return.

In this season of graduation and advancement to the next grade, college starts to draw nearer for many students (and money worries for their parents). If you have extra money to gift, education is a great way to use your annual exclusion!

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