Saving for college and saving on taxes can be accomplished thanks to Education Savings Accounts, commonly referred to as “529” plans. The number refers to the section of the Internal Revenue Code which authorizes these accounts.
As we all know, it is challenging to use gifting as a tax efficiency strategy because of the existence of the federal gift tax. This levy is unified with the estate tax. While there is an exclusion of $5,43 million for the year 2015, it is just one unified exclusion that applies to gifting as well as the value of your estate.
To provide clarity by way of example, this means that someone who gave away $5.43 million (currently adjusted for inflation) in taxable gifts throughout his or her life using this exclusion would have nothing left to apply to his or her estate.
In addition to the above-noted lifetime exclusion, there also is an annual $14,000 exclusion (adjusted for inflation) that exists outside of the unified exclusion. You can give as much as $14,000 to anyone you choose during a given year free of the gift tax. A husband and wife each have a $14,000 annual exclusion.
This can be utilized to fund a 529 plan for the benefit of a loved one who is going to attend college in the future. Most states, including California, offer 529 savings plans. They work similar to a 401(k) plan in that you make contributions, and those funds are invested.
In addition to tax-free growth, the withdrawals are not taxable when the beneficiary uses them to pay for approved college expenses.
If you limit your contributions to $14,000 per tax year, you are reducing the taxable value of your estate as you fund the 529 college savings account without being exposed to the gift tax consequences.
More information about these plans is available on a helpful website: www.savingforcollege.com.