Plan Ahead
to Shape
the
Future |
If you want to
help your grandchildren through college, there are several
options to help pay their expenses and trim your family's tax
bill at the same time. Here are three tax-wise tips to get the
maximum bang out of your education buck:
|
 Write a check
| The
tax law lets you give $12,000 in cash a year for 2006 —
or $24,000 if your spouse contributes — without
having to pay a gift tax (up from $11,000 and $22,000
respectively for 2005). Just write out checks and give
them to your grandchildren. If the children still have a few
years 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.
|
Give
stock
| If you give appreciated stock or other
investments to your college-bound grandkids, your family
can slash the capital gains tax bill. Let's say you're in
the 33 percent tax bracket and you want to sell stock you've
owned two years to free up some cash for tuition. For stock
sold in 2005 or 2006, you'll wind up paying a 15 percent
capital gains tax rate on the profit. But if you give the
stock to your teenage grandson, he can sell the assets and pay
only 5 percent tax on the gain, assuming he’s in the 10
or 15 percent tax brackets. This saves your family a nice
chunk of money that can be applied toward college expenses.
(NOTE: According to
theTax
Increase Prevention and Reconciliation Act signed by
President Bush in May 2006 the five percent capital gains rate
is effective through 2007. For 2008-2010, the rate will drop
to zero. The same preferential treatment will also apply
to qualified dividends received through 2010.)
|
Pay tuition
yourself | Under current tax law,
unlimited tuition payments can be given directly to a college
with no gift-tax implications. The catch is the money cannot
pass through the hands of grandchildren (or their parents)
first. It must go directly from your account to the
university. This 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 and
your spouse can still each give the child a tax-free cash gift
of up to $12,000 in 2007 to cover those other expenses.
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