Education costs continue to rise across the U.S., making it difficult for many students to afford the institution of their choice. If you’d like to lessen the burden for a loved one while also saving on taxes, gifting into a 529 plan might be right for you.
A 529 plan is a qualified tuition plan that allows assets within the account to grow tax-free. Furthermore, withdrawals from these plans are not subject to federal income tax so long as the withdrawals are for eligible expenses. These expenses include:
- Tuition, fees, and expenses for books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution
- Up to $10,000 per designated beneficiary per tax year for expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school
- Certain expenses for the purchase of computer or peripheral equipment, computer software, or internet access and related services
- Expenses for special needs services
- Room and board costs (subject to a limit) for students who are at least half-time
- Fees, books, supplies, and equipment required for a designated beneficiary’s participation in a qualified apprenticeship program
- Subject to a lifetime limit of $10,000, principal or interest on a qualified education loan
- Subject to a lifetime limit of $35,000, funds distributed from a qualified tuition plan after Dec. 31, 2023, can be rolled over tax- and penalty-free to Roth IRAs
The above provisions show numerous ways in which you may help a loved one obtain their education; but, you also need to be aware of possible gift tax implications. A contribution made to a 529 plan is not subject to gift tax as long as it does not exceed the annual exclusion in a given year. For 2023 you can give up to $17,000 to an individual free of gift tax, while this annual exclusion jumps to $18,000 in 2024 due to the rise in inflation.
Amounts gifted above the annual exclusion threshold will typically utilize some of your lifetime gift and estate tax exemption, if available. However, it is possible to gift more than the annual exclusion amount by “front-loading” the account and making a special election on a gift tax return. With this election you can gift up to five times the annual exclusion (up to $85,000 for 2023) without incurring gift tax or using any of your lifetime exemption; you’re essentially spreading this gift over 5 years even though it all happened in the first year. So, if you go this route, it’s important to keep accurate records so you don’t accidentally incur unintended gift tax consequences in a subsequent year.
Saving for an education can be a daunting task, but a 529 plan can make it more feasible. These plans can be a smart way to allow savings to appreciate without paying tax on the earnings or withdrawals. Contact us today to learn more about our estate and trust planning services.
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