If you’re looking for a way to make gifted money go further, you may be wondering if 529 gifts are tax deductible. The answer is a little complicated, but we’ll break it down for you. In general, the IRS considers any money given to another person as a gift.
However, there are some exceptions to this rule. For example, if you give someone money for their education or medical expenses, the IRS does not consider this a gift.
Giving to a 529 plan can be a great way to save for a child’s future education expenses. And, if you itemize your taxes, you may be able to deduct some of your contributions.
For the 2017 tax year, the maximum deduction is $500 per person, per year.
So, if you and your spouse each contribute $500 to a 529 plan for your child, you can deduct a total of $1,000 on your taxes.
To claim the deduction, you’ll need to itemize using Schedule A of Form 1040. Then, enter the amount of your contribution on line 34.
Keep in mind that there are other restrictions when it comes to deducting 529 contributions. For example, you can only deduct contributions made with cash or checks – not stocks or other assets. And, if your income is too high, you may not be able to claim the deduction at all.
How to Understand the Gift Tax on the 529 Plan Contributions?
Is a Contribution to a 529 Plan a Taxable Gift?
A contribution to a 529 plan is not considered a taxable gift if it falls below the annual gifting limit, which is currently $15,000 per year. However, if you contribute more than $15,000 in a single year, the excess amount will be subject to gift taxes.
Are Contributions to a Grandchild’S 529 Tax Deductible?
There are a few things to know about 529s and taxes. Contributions to a 529 are not tax deductible on your federal income taxes, but they may be eligible for state tax deductions or credits. Withdrawals from the account are tax-free as long as they’re used for qualified education expenses.
Now, let’s talk about grandkids and 529s specifically. When you contribute to a grandchild’s 529, you are not making a gift for tax purposes (as you would if you gave them cash), so you cannot take a federal gift tax deduction. However, depending on your state’s rules, you may be able to take a state income tax deduction or credit for your contribution.
As the account owner, you control when and how the money in the account is spent. You can use it for any qualified education expense at any accredited institution – including college, graduate school, vocational school, and even some K-12 expenses. And because the money in the account grows tax-deferred (and withdrawals are tax-free), it can really add up over time!
How Do I Report 529 Contributions to a Gift Tax Return?
Assuming you are the donor/contributor:
For a 529 plan, you would report the contribution on Schedule A of Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. On Schedule A, you would list the name of the donee and the date and amount of the gift.
You would not report the contribution on your personal income tax return.
Credit: www.savingforcollege.com
Can a Grandparent Contribute to a 529 Plan And Claim a Tax Deduction?
Yes, a grandparent can contribute to a 529 plan and claim a tax deduction. Here’s how it works:
The grandparent contributes money to the 529 plan.
The money is then invested in the stock market or other investments. The earnings on the investment grow tax-deferred. When the child withdraws the money for college expenses, the withdrawals are not taxed.
There are two ways a grandparent can take a tax deduction for their contribution to a 529 plan. The first way is through an IRS income tax deduction. The second way is through a state income tax deduction.
Many states offer an income tax deduction for contributions to a 529 plan.
Conclusion
The short answer is no, 529 gifts are not tax deductible. The reason for this is because the money in a 529 plan grows tax-free and can be withdrawn tax-free as long as it’s used for qualified education expenses. So, if you were to gift money to a 529 plan and then deduct it on your taxes, you would essentially be double dipping and getting a tax break on the same money twice.
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