Family members have the best intentions when they offer money to cover college expenses, but if they neglect to use a wise gifting strategy they could affect the student’s eligibility for federal aid. With hundreds of higher education institutions, state and private universities in North Carolina, students have no shortage of options. However, the cost of college can range from several thousand to over $45,000 per year.
One of the best tools available to pay for higher education is a 529 college savings plan.529 accounts allow anyone to make a gift (which reduces the giver’s taxable estate) and the money can grow tax-free. Later, as long as the money is used for educational expenses, money from a 529 account can be withdrawn with no tax or penalties. North Carolina offers a tax deduction for residents for contributions of up to $5,000 (couple) to a 529 plan. If a 529 account was never set up, family may be inclined to gift money directly to the student. In these situations, advanced planning helps reduce negative tax and financial aid implications.
Whether a child, grandchild, niece or nephew is going off to college for the first time, or if a family member is returning for another degree, the price tag of a college education is no less daunting. Usually the decision to go to college is not an overnight one. Standardized tests must be complete, applications submitted, and a specific institution chosen. Since family members have advanced knowledge about when the student is planning to leave for college, they can time their gifts strategically:
1. Make gifts after federal aid is established and the tuition bill arrives. Since federal student aid applications require disclosure of savings, any additional money in accounts will reduce the student’s eligibility for aid. For young students who are still dependents, even money under their parents’ names will be factored into their aid application.
2. Send gifts to parents. When a relative gives money directly to the student they are affecting the student’s eligibility for financial aid. Wait until federal aid is established before gifting money to the student’s parents.
3. Consider covering other expenses. If you choose to cover the car payment for a commuter student, or the mortgage of a loved one returning to school who is also supporting their own family, make sure the bills you are paying on their behalf do not exceed $14,000 per year (2013). If the amounts given are in excess there are necessary gift tax reporting requirements. (However, gifting directly to an educational institution for payment of tuition is not subject to the $14,000 annual exclusion. These gifts are unlimited.)
Effective January 1, 2009, the North Carolina gift tax was repealed. Individuals in North Carolina who choose to make gifts will only need to consider federal gift tax; the annual exclusion for gifts is $14,000. Start talking about covering the cost of college, and if college is still many years away, set up a 529 plan now to help ease the burden later on.