Tax strategies for college savings and gifting
Find out how you can you use the tax code to your benefit when saving or gifting money for a loved one’s college education.
Whether you’re saving for your own child’s education or helping a grandchild, or loved one, pay for school, there are several tax-advantaged strategies to consider.
For example, 529 plans offer attractive tax benefits, and gift tax rules provide generous exemptions for college tuition. But what’s right for your financial situation and student?
Along with your tax professional, an Ameriprise financial advisor will help you navigate complex IRS rules to help ensure that your college savings plan is tax efficient and meets your financial goals.
In this article
- 529 plans – gifting and tax considerations
- Estate planning strategies for grandparents
- How college savings gifts may affect financial aid
- Tax credits and deductions
- Questions to ask your Ameriprise financial advisor
Anyone — a parent, family friend or extended family member — can contribute to a 529 plan.
As a tax-advantaged savings account specifically designed for educational expenses, a 529 college savings plan gift can provide tax benefits to those who want to help with a child’s education expenses.
A 529 plan allows you to contribute after-tax money into an investment account on behalf of a designated beneficiary (usually your child, but it could be a grandchild, niece, nephew, family friend or even you). The money grows tax-deferred, and withdrawals are tax-free if the distributions are used for qualified education expenses.
Qualified education expenses include:
- The full cost of tuition, fees, books, computers and related equipment and room and board (assuming the student is attending at least part-time) at any college or graduate school in the U.S. or abroad accredited by the U.S. Department of Education.
- The cost of certified apprenticeship programs registered with the U.S. Department of Labor.
- Student loan repayments (up to a $10,000 lifetime limit per beneficiary and $10,000 per each of the beneficiary's siblings).1
- K-12 tuition expenses up to $10,000 per year.
Though 529 plan contributions are considered gifts for federal tax purposes, you can contribute up to a certain amount per year without incurring gift taxes.
For 2023, these limits are:
- $17,000 per donee per year
- $34,000 for spouses who join in the gift2
More than 30 states now offer a state income tax deduction or tax credit for 529 plan contributions. However, in most cases you must contribute to your home state’s 529 plan to qualify for the benefit. A few states, however, allow you to claim a state tax benefit for contributions to any state’s 529 plan. Resources such as the College Savings Plan Network offer tools to see the tax deductions available in your state and compare 529 plan options. Work with your tax advisor to determine an appropriate option for your circumstances.
Contribute more during high-income years
There's no way to time your 529 plan contributions to minimize federal taxes. However, if your state offers an income tax deduction for contributing to its plan, consider contributing as much as possible in your high-income years.3
For those looking to remove assets from a taxable estate while also funding a loved one’s education, the following college savings gift options can be valuable strategies:
Under special rules unique to 529 plans, you can gift a lump sum of up to five times the amount of the annual gift tax exclusion — $85,000 for individual gifts or $170,000 for joint gifts in 2023 — and still avoid the federal gift tax. To do so, you must elect to spread the gift evenly over five years on your tax return. A person who chooses to take full advantage of the five-year spread for 529 plans would not be able to give additional gifts to that person during the five-year period without filing a gift tax return, unless the gift tax exclusion were increased, such as through an inflation adjustment in a subsequent year.
In addition to superfunding, another way grandparents can preserve their gift tax exclusion — and potentially remove assets from their estate — is writing a check directly to their grandchild’s school.
Tuition payments made directly to a college are not considered gifts for tax purposes, nor do they count toward the annual gift tax exclusion or use up any of the grandparents’ lifetime gift tax exemption. However, the exclusion only applies to tuition payments and not for other college expenses like books, supplies or even room and board.
- Learn more: 529 plans: frequenty asked questions
Assets owned by grandparents (or anyone other than a custodial parent) that will be used for college — like a 529 plan — don’t need to be reported on the FAFSA.
In previous years, money distributed to the student or spent on their behalf had to be reported as untaxed income, which in some instances, significantly impacted the amount of aid the student was eligible for. But starting in 2022, money distributed to the student or spent on their behalf by nonparents is no longer reported as untaxed income and doesn’t impact the amount of aid the student will be eligible for.
(Note that because the FAFSA considers distributions received from anyone other than a parent two years prior to the year of filing as the basis for aid calculations, distributions from 2020 and 2021 will be reported on the FAFSA over the next two years.)
The College Scholarship Service (CSS) Profile, meanwhile, counts all 529 plans that list the student as a beneficiary, regardless of the account owner, in its asset calculations. The CSS Profile also includes a sibling’s 529 plan (at least those under age 19 and not yet in college) when determining expected family contribution.
There are several federal tax incentives aimed at offsetting the financial cost of higher education:
- American Opportunity Tax Credit: This partially refundable credit is worth up to $2,500 for tuition and related expenses for the first four years of undergraduate education, provided the student is enrolled in school at least part-time. The credit is subject to income limitations and other eligibility requirements, and it can’t be claimed for the same expenses paid for with a distribution from a 529 plan.
- Lifetime Learning Credit: This credit can be claimed for tuition and fees for undergraduate, graduate or professional degree courses taken throughout a student’s lifetime. Students can claim 20% of the first $10,000 of qualified educational expenses (listed in the student’s 1090-T, Tuition Statement) up to $2,000, and there is no limit on the number of years a student can claim the credit. However, this credit is phased-out at certain income levels. Though the credit is not refundable, it is a credit against taxes owed. Importantly, the Lifetime Learning Credit and the American Opportunity Credit can't be claimed in the same year for the same student.
- Student loan interest deduction: If you’ve graduated with student loans, this deduction allows you to deduct up to $2,500 of the interest you pay on student loans each year, depending on your household income.
When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.
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Optimize your college saving and gift giving for taxes
Whether you are a parent or grandparent saving for college, or are just looking to help a loved one pay for school (without hurting their chances of getting financial aid), your Ameriprise financial advisor will help you craft a tax-advantaged strategy that works for them — and for you and your financial goals.
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1 A student loan distribution can be made from an account to a sibling of the account's designated beneficiary without changing the designated beneficiary.
2 Spouses can consent to split gifts, for example if a gift is only given by one spouse, by indicating their consent on a gift tax return.
3 Work with your tax advisor to understand any potential federal, state, or gift tax consequences.
This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.
By clicking the College Savings Plans Network and IRS links, you will leave ameriprise.com. The included hyperlinks are provided for informational purposes only and are not an indication or endorsement of the content therein or affiliation with respect to the linked site. Be aware that the linked site will be subject to rules, regulation, and privacy and security provisions that are separate, and may differ, from Ameriprise Financial.
Clients should carefully consider the investment objectives, risks, charges and expenses associated with a 529 plan before investing. More information regarding a particular 529 plan is available in the issuer’s official statement, which may be obtained from an Ameriprise financial advisor. Investors should read the 529 plan’s official statement carefully before investing.
Clients contributing to a 529 plan offered by a state in which they are not a resident should consider before investing whether there, or their designated beneficiary(s) home state offers any state tax or other benefits only available for investments in such state’s qualified tuition program.
The earnings portion of money withdrawn from a 529 plan that is not spent on eligible expenses will be subject to income tax, an additional 10% federal tax penalty, and the possibility of a recapture of any state tax deductions or credits taken.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
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