This school year has been like no other. Students, teachers and parents have all been tested, and graduating seniors have perhaps made the biggest sacrifice by not being able to participate in commencement ceremonies. You may want to show your extra appreciation and admiration for their hard work and congratulations on a job well-done by gifting them the gift of money to give them a good start on the next season of their lives.
The first thing to know when giving gifts of anything of value – whether cash, a valuable asset like a car, home or boat, paying off a debt or extending an interest-free loan – is the gift-giver could be subject to federal gift taxes. The good news is, though, the gift tax does not kick in if you gift under a certain amount. In 2020, the annual gift exclusion limit is $15,000 per person. If you have two children who are graduating this year, you could give each of them up to $15,000 before you would be subject to gift taxes. Likewise, married couples can split their gifts, maximizing their giving. In other words, a married couple could each give their child up to $15,000 for a total of $30,000 before they would be subject to gift taxes.
Another way to help a graduating senior would be to make a tuition payment directly to the student’s college or graduate program. There is no limit on how much you can pay in direct tuition payments, but there is a risk involved for the recipient. Directly gifting tuition payments can reduce the student’s eligibility for financial aid assistance since the tuition payment can be viewed as untaxed income.
Even cash gifts can have an impact. A student’s financial aid package can be reduced by as much as 50 percent of the value of student income reported on the FAFSA as a result of a cash gift. In other words, a financial gift of $10,000 to help pay for college could reduce the federal financial aid by $5,000 the following year.
Contributing to a Section 529 education savings plan is one option for tax-exempt gifting for educational purposes.
Any person can make cash contributions to a 529 plan on behalf of a designated beneficiary. Although there is no federal tax deduction for 529 plan contributions, many states do allow a deduction for these contributions. The earnings on the contributions accumulate tax-free.
Distributions from a 529 plan are not taxable as long as the funds are used for the designated beneficiary’s qualified higher education expenses or registered apprenticeships, including fees, books, supplies, and equipment. In addition, tax-free distributions (up to $10,000 – cumulative, not annual) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary or a sibling of the designated beneficiary.
Lindsey Pierce, CPA, is a partner with Antares Group, Inc. She can be reached at firstname.lastname@example.org.