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How to Help Your Kids & Your Taxes

We’re deep in to tax season and that means that Americans are thinking about the ways they can better position themselves in the coming year to pay less taxes. For higher net worth individuals, giving to their children in amounts that surpass $13,000 becomes a problem because they can trigger the 35% gift tax [3].

There are a variety of ways to give to your children or grandchildren while making your bank account as tax efficient as possible while helping the child with their future or present large scale expenses.

The 529

The 529 plan may be best way to give to your children or grandchildren and also score a big tax break for yourself. The 520 plan is a tax friendly way to save for a person’s future education expenses. Not only can you donate up to $13,000 to avoid the gift tax, if your child is enrolled in your state’s 529 plan, you may qualify for a state tax break.

Additionally, for those with a lot of money saved, the IRS allows up to five years of contributions to be combined in to one year providing no contributions are made in the years that were paid ahead. Not only does this allow for a larger contribution but it also puts the money to work much earlier allowing the money to compound for a longer period of time.

Direct Payment

If you pay directly to your child’s college or university, your payments are exempt from the gift tax limit. This exemption is available to anybody who makes the payment including grandparents who may be arranging their estate to avoid future estate taxes upon their death.

This exclusion only applies to tuition payments. Payments made for room and board, books, or other educational expenses fall within the normal gift tax limit.

Tuition Payments

If you’re paying tuition for a child who is in their first four years of college, you may be eligible for a deduction under the American Opportunity Credit Act. To qualify for the credit [4], you have to spend at least $4,000 in tuition and other qualified expenses and your adjusted gross income has to be below $160,000 if you’re married or $80,000 if you’re single. Finally, the student has to be a dependent in order to qualify.

Help with a Roth IRA

Anybody can contribute to a Roth IRA providing they have earned income from a job. That can be the normal jobs fit for a minor like babysitting, lawn mowing, or anything else. The contribution is limited to the amount of money they earned but you can give them some of the money to contribute.

Not only will you get a tax break on your gift, but your child or grandchild will get the reward of money that compounds over a much longer period of time than those who wait to start the IRA later in life.


Don’t miss out on the tax advantages that are inherent in helping your children or grandchildren save for their education or retirement even though it may be far into the future. If you’re trying to avoid gift and estate taxes, it is best to consult with an estate planner or attorney.

(Photo: vincealongi [5])