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Good News - Bad News on 529 Gift Tax Situation
When investing in anything, particularly for college, many advantages and disadvantages go hand in hand with the
savings. For example, there are many tax advantages to having a 529 savings plan, but there is the disadvantage its
intention is solely for college. This means that you are able to save more money than you can with any other
investment, but if this money’s purpose changes, this savings no longer applies. Similarly, there are both good and
bad points on the gift tax situation of the 529 savings plan for college. The first and most important thing to
understand about gift tax issues on your 529 savings plan is that the rules may vary from state to state. This is
very important, and if it is an issue with you, considering the rules and regulations of other states’ programs may
be a good way to go.
Typically, gift taxes are taxes paid on gifts of monetary funds because they are a source of income. These taxes
may apply when relating to a 529 savings plan, but there are limitations. It is important to understand that the
gift tax limitations stop at $12,000 per year, which may be bad news for those who need to use more funds than
this. However, this increased in 2006 from the $11,000 it was originally set at, and may increase to an amount even
higher than that by the time your child reaches college age. It is also important to know that this only applies if
the owner of the account is a single person. This is double that amount for a couple, and modifications are
possible if the amount of contributions will exceed this limit.
For example, if you make an agreement to contribute in equal amounts over a five year period, you will be allowed
to contribute up to $60,000 every calendar year for an individual or double this for a couple. By agreeing to
contribute in equal amounts, and to make no other monetary gifts to the beneficiary, you will receive gift tax
exclusions through the federal government. Typically, this would not be possible, and the cost of investing would
be much higher.
The bad news about this gift tax is that this applies at the federal level. For those living in, and contributing
to, state programs of the 529-college savings plan of states that have no income tax, this is the only concern.
However, the rules may be different for gift taxes at the state level if there is a state income tax. This is why
it is important to discuss and fully understand all aspects of the 529 plan within your state, and to consider
possibly investing in other states. By talking to your tax advisor, you will be able to determine whether it is
best to invest in the 529 plan of your own state or to contribute to an account run in a state with no income tax,
and therefore no gift tax.
You should also know what benefits you may be losing if you do choose to go this route, as most states offer
incentives for those who use their own state’s program. By knowing all this information, you will be able to
understand how the gift tax laws will affect you and your beneficiary, and you can make the best choice regarding
investment for college. Keep in mind that the amount of research involved in finding the best college savings plan
may be equal the research needed in finding the best school in which to use those funds. Spending as much time as
necessary doing the research can literally pay off in the end.
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