Grandparents can be valuable financial resources for students who have college plans but encounter difficulty coming up with the money to pay for higher education. While most college savings plans are geared toward contributions from parents, grandparents can also play a major role, and even enjoy tax deductions, for contributing money to their grandchildren's college education funds.
529 Plan Deductions
529 college savings plans are intended to set aside and grow money for a beneficiary's college education. Grandparents can contribute to 529 plans if the plans include provisions for accepting contributions from third parties. All plans allow parents and the student beneficiaries themselves to contribute. When grandparents can contribute as third parties, they may claim their contributions as state income tax deductions only when they live in states that allow 529 contribution deductions. Contribution and deduction limits are on a state-by-state basis.
Education Expense Deductions
Grandparents who are legal guardians of their grandchildren, and claim them as dependents on their federal income taxes, can deduct the cost of education expenses. This includes money paid for a student's tuition and fees, room and board, books, and travel to and from school. Grandparents can only claim these expenses as federal and state income tax deductions when they actually pay them, not when they give money to a student for future spending on education expenses.
Federal Contribution Deductions
There are no federal tax deductions for grandparents who contribute to 529 college savings plans or related products, such as Coverdell accounts, for their grandchildren. These deductions are exclusive to state income tax codes, which limits how much they can save on taxes. Grandparents can choose to give money that they save from other eligible tax deductions to help pay for college, but this has additional tax consequences.
Gift Tax Exemptions
One way for grandparents to contribute to college savings for their grandchildren is through gifts that parents invest in 529 plans, or that students hold in savings accounts and later spend on college expenses. As of 2011, up to $13,000 in gifts are exempt from the gift tax. This means that while grandparents who contribute up to this amount to a student's education fund don't receive tax deduction eligibility, they do prevent their grandchildren from being liable for tax on the money.
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