Gift with a tax deduction?
In most instances, if you give a gift to a family member, you not only don’t receive a tax break, but you need to be mindful of the amount of the gift in case a gift tax return needs to be filed.
Wow. That sentence just put me to sleep.
Let’s try that again.
I want to help my kids and/or grandkids prepare to pay for college. Is a 529 plan the best route to go?
A couple perks of the 529 plan:
- The 529 plan is a state-sponsored plan that allows you to invest money and let it grow tax-free. No taxes on interest, dividends, or capital gains as long as the distributions from the plan are used to pay for college expenses for the beneficiary.
- Although there is no deduction on the federal side for contributions, the state of Iowa (along with 34 other states) allows for a deduction on the state income tax return. The state of Iowa allows for up to $3,239 per beneficiary per year as a deduction.
- That’s not the max contribution, though. You can contribute as much as you’d like within gifting limitations. But even then, you can spread out large gifts over five years.
- You can change the beneficiary on the plan at any time with no penalty. So, if your child or grandchild gets a full-ride or decides college isn’t for them, you can easily shift the investments to another beneficiary.
- Each state has their own investment model. The state of Iowa’s College Savings Iowa plan has multiple investment options and has some of the lowest internal fees available.
So, basically, in most states, if you want to give a gift to your child or grandchild, you can do so by contributing to a 529 plan for them. In the state of Iowa, not only can you give the gift, you can receive a deduction on your Iowa tax return.
Give a gift, get a deduction, and allow the gift to grow tax-free. Win/win/win. Well, except for the child. He/she would probably rather have a tangible gift now. Maybe a stuffed unicorn (I’ve heard that unicorns are very rare).
Although they might not appreciate it as much now, they hopefully will enjoy the benefit in the future and think of you while they are taking their college finals.
PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure/. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.