Tax Implications of Funding a Grandchild’s Education

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By Susan G. Corderman Clifford, CPA – Principal

If you are a grandparent in a financial position to help your grandchildren with their college education, you may be wondering what the tax implication might be.  There are three types of taxes you may need to consider if you are talking about a grandchild’s college education: gift tax, generation skipping tax (GST), and income tax.

If you make tuition payments directly to the educational institution (this would include private school tuition for kindergarten through twelfth grade), there is no gift tax or GST.  Payments for room, board, books, travel, school fees, etc., even if paid directly to the school, are not excluded from gift tax and GST.  However, the annual exclusion is $15,000 in 2019 ($30,000 if your spouse elects to gift split), so if these expenses, plus any gifts you make during the year, total less than the annual exclusion, there is no gift tax or GST.  If you exceed the annual exclusion, you will need to file a gift tax return, but since the lifetime exclusion is currently $11,400,000, this shouldn’t be a problem for most people.

If your grandchildren are younger, you may want to set up a 529 plan account.  You can gift the annual exclusion amount without worrying about a gift tax return.  You can gift up to $75,000 (twice that if you spouse elects to gift split) in one year and elect to spread the gift over five years to take advantage of five years of annual exclusions.  If you set up a 529 plan in your home state, you may be able to get a deduction for the gift on your state income tax return.  Georgia allows a deduction of $2,000 per beneficiary per year (so twice that on a married filing jointly return).  South Carolina allows an unlimited deduction – whatever you contribute, you can deduct so long as you have the income.

If a grandparent has a grandchild who qualifies as a dependent for tax purposes, then the gift rules above for education expenses do not apply since education expenses are not considered reportable gifts for qualified dependents. Keep in mind the qualifications for dependency are as follows:

  • Your grandchild cannot claim his/she own exemption nor be claimed by his/her parents. 
  • Your grandchild must not provide more than half of his/her support, and he/she must live with you more than half the year.  But a grandchild attending college full-time can still be considered to be living with you if he/she uses your address as his/her permanent residence (voter registration and driver’s license at your residence will help support this claim).  If either parent can also claim the child, you can only do so if your income is higher than either of theirs.
  • If you can claim your grandchild as your dependent, you would be eligible for the American Opportunity Credit for the first four years of undergraduate education (the eligibility for this credit phases out for incomes above $90,000 for an individual or $180,000 if married filing jointly).

If you are considering funding a grandchild’s education, we suggest you discuss it with your financial and tax advisors to make sure you understand the implications for your personal financial situation.

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