Here's some tax advice from the National Tax Advice Day web site on how to handle college expenses for income tax purposes if you are paying part of someone's college costs:
Saving for a child's college education is not limited to just his or parents. Let's explore the role of grandparents and other sponsors who wish to help pay the college bills of a grandchild or other beneficiary.
Whether you're a wealthy aunt or uncle, or simply a charitable person wishing to help pay a deserving student's way through college, many of today's tax-advantaged savings vehicles for college are available to you.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) expanded the use of Section 529 plans to help save for a child's or grandchild's college. These plans allow you to set aside well over $100,000, in aggregate, for a single grandchild's college education.
As long as your grandchild uses the money in these accounts for qualified higher education expenses, the withdrawals are tax-free.
Unlike UGMA/UTMA accounts, the money you save in a Section 529 plan for grandchildren is controlled by you. You also can change beneficiaries of a Section 529 plan easily.
Section 529 plans can be front-loaded with an investment of up to $55,000 in a single year per child. However, since gift taxes are levied on gifts of more than $11,000 per child in a year, you will have to coordinate your funding of a Section 529 plan with your overall estate planning. If you give the maximum of $55,000, you will have to wait for another four years before you are able to give additional amounts free of gift taxes. (The $11,000 a year exclusion limit, multiplied by five years, in this example.)
While nothing comes quite as close to the tax benefits of Section 529 plans, grandparents or other sponsors can also open an education savings account to pay for a grandchild's or beneficiary's college education.
EGTRRA also boosted the advantages of education savings accounts. (Education savings accounts were formerly called education IRAs.) You can contribute $2,000 a year, after taxes, to each beneficiary's education savings account. In addition to being used tax free to pay for qualified higher education expenses, the funds in an education savings account can also be used tax free to pay for qualified educational expenses paid to attend secondary schools.
Finally, don't forget about making contributions to charitable organizations. You can always make a gift or endowment to a foundation or scholarship fund to give hope to some youngster's college aspirations.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
For tax-related questions, FMF recommends: H&R Block. Do it yourself or have us do it. It's never been easier.
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