How much can I contribute to my grandson’s 529 college-savings account this year without exceeding the gift tax limit? Can I get a state income tax deduction for the full contribution?
You can generally give any number of people $14,000 in 2016 without being subject to gift taxes. (If you give more than that, your gifts could reduce your lifetime estate tax exclusion, which is currently $5.45 million per person.) But there is a special rule for 529 contributions. You can make five years’ worth of gifts to a 529 account in one year without triggering the gift tax. That means you can contribute $70,000 to your grandson’s 529 this year, as long as you don’t make any other contributions within the next five years. Your spouse can give up to $70,000 in one year, too, enabling the two of you to make up to $140,000 in contributions to your grandson’s 529 this year. You can contribute up to that much to other people’s 529s in one year, too. This can be a good strategy to shift money out of your estate and also help your grandkids build up savings they can use tax-free for college costs.
If you do contribute more than $14,000 to anyone in 2016, you’ll have to file IRS Form 709 reporting the gift. You will not be subject to gift taxes, but you will need to file the form in the year you give the extra money to the 529, to report that you are treating the contribution as if you made it over up to five years. See the Instructions to Form 709 for more information.
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States have different rules about deducting 529 contributions. About two-thirds of the states offer a state income tax deduction for contributions, but you generally need to contribute to an account in your own state to get the break (Arizona, Kansas, Missouri, Montana and Pennsylvania, however, offer a tax break for contributing to any state’s plan). Some plans only let the account owner take the tax break, so a grandparent wouldn’t be able to deduct the contribution if the parents are the account owners; however, the grandparent could open a separate account for the grandchild. (There can be some downsides to withdrawals from grandparent-owned 529s when it comes to financial aid, though – see Limit the Impact of Grandparent-Owned 529 Plans on Financial Aid for more information.)
Most states limit the amount you can deduct in one year, although some let you carry over excess deductions for several years. Maryland, for example, lets account owners deduct up to $2,500 in contributions per beneficiary each year (or $5,000 per beneficiary for married couples), but it allows you to carry forward excess contributions for up to 10 years. For more information about the tax deduction rules for each state’s plan, see SavingforCollege.com. See The Best 529 College-Savings Plans for our favorite plans.