14 Sep 2018
Until recently, many parents relied on home equity loans to pay for college. But, with last year’s tax law changes, interest on these loans is no longer deductible if used to pay for education. For parents and grandparents alike, Section 529 plans and direct payments to an educational institution are the best alternatives.
With a 529 plan, any U.S. citizen, age 18 or over, can put up to $15,000 away each year for a beneficiary’s education expenses. Prior to this year, 529s could only fund higher education expenses, including tuition, room and board and books. Now, these plans can fund tuition for primary, secondary, religious and public education, as well, but the limit is $10,000 for primary and secondary education expenses.
The limits apply on a per student basis, but parents and grandparents can each set up an account for the same student. Also, there is no limit to the number of accounts that can be established, making these plans a good idea for grandparents with many grandchildren.
While the $15,000 contribution is not deductible for federal taxes purposes, all or part may be deductible for state income tax purposes. (In NY, $5,000 is deductible.) The real benefit of these plans is the benefit of compound tax free earnings, much like an IRA.
Contributions to these plans count towards the $15,000 per person, annual gift tax exclusion. This means they are not subject to gift tax for up to $15,000 in 2018. Tuition payments made directly to an educational institution do not count as a gift and do not eat up the annual exclusion. With the high federal gift/estate exemption of $11.2 million, this may not be relevant for most people. However, for high net worth grandparents, the gift tax free payments directly to an educational institution are valuable.