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What is the maximum "gift" I can give before I am taxed?

My wife and I are in a position to gift our grandchildren money for college. Our concern is tax-related, as we would both like to contribute the maximum amount. Will the maximum amount apply to the individual who receives the gift or can my wife and I each contribute the maximum to the same grandchild. (We have 3 grandchildren).

Feb 08, 2012 by Gordon from Worcester, MA in  |  Flag
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2 votes

Let me preface my answer by saying that I am not a tax advisor, and you should be sure to check with your own tax advisor prior to making any decisions.

This gift tax issue is one that our clients face regularly. The short answer is that gift tax will most likely not be a problem for you. In 2012 the gift tax exclusion amount is $13,000, which means that each of you and your wife can make a $13,000 gift to each grandchild without triggering any tax issues or dipping into your lifetime limit. In addition, the IRS specifically allows you to front-load the exclusion on up to five years of gifts for 529 college savings accounts. So $26,000 becomes $130,000 per child, $390,000 total. If you intend to contribute more than $130,000 per child, there are other, more complex ways of managing the gift tax issues. Feel free to contact me privately if you would like more information, including our view about the best 529 Plan (I will give you a hint - it's in Utah) --- Good luck!

1 Comment   |  Flag   |  Feb 08, 2012 from San Francisco, CA
James P. Dowd, CFA

One other point that I should have made: if you have grandchildren who are already in college, you can make a direct payment of tuition to the educational institution without using up any of your general exclusion amount (the $13,000 per person per year). Such payments qualify for an education exclusion, which is separate and distinct from the general exclusion. Direct payment of medical expenses to a medical institution also are disregarded for gift tax purposes. You can read more about these exclusions in Publication 590, on pages 3 and 4.

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Flag |  Feb 08, 2012 near San Francisco, CA

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Gordon, you will also want to see if your state grants a deduction for contributions to a 529 plan, as that can give YOU a gift back by way of lower taxes.

Comment   |  Flag   |  Feb 08, 2012 from Arvada, CO

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In 2012 you can each gift away up to $5,120,000 while you're alive and none of that would be taxable - unless you've used up some of your lifetime exemption in previous years. Currently, if Congress doesn't change the law, this number will revert back to $1 million in 2013. So, there's a window of opportunity for those who have very large estates. Talk with a qualified, experienced estate planning attorney before you do anything.

Comment   |  Flag   |  Feb 08, 2012 from San Diego, CA

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