There is no better source of greater pleasure in life for aged taxpayers than spoiling their grandchildren by showering them with all kinds of gifts. The young ones too, seem to have some deeper connections to their grandparents than their own parents. With college libro de ucdm increasingly becoming expensive, the grandparents can chip in and at the same time, enjoy extensive tax benefits. There are several tax-friendly channels available for older taxpayers who desire to see their grandkids through college, by helping cover their college costs.
Also referred to as prepaid education arrangements or prepaid tuition programs, prepaid tuition plans offers families a way to beat rising costs of living buy virtually buying the projected future cost of education using the current prevailing rates. Sold in contracts or in units, these plans cover up a given number of year’s tuition or a certain number of credits. These plans have the blessings of the state and avail a low-risk option for state-conscious donors with the desire to move large amounts of assets to their heirs without cutting their integrated credit. The withdrawal penalties and a relatively low return rate compared to other options, like college savings plans, are the main downsides of these plans. Moreover, these plans are only accessible by in-state residents and school alumni and may further be restricted to within-the-state public institutions. Some of these plans don’t cater for the costs of private or out-of state schools.
Established by a state or eligible educational institution, college savings plans allows individuals to contribute towards the financing of the beneficiary’s higher education. The contributions are made to a college saving account and the balance in the amount is determined by the performance of the primary investments. This eventually affects the amount of finances available to meet the recipient’s education expenses.
All contributions build up on a tax-deferred foundation basis and earnings are tax free if a qualified education expense is used. Residents whom use their state’s plan, plus a tax break for the rich taxpayers looking for ways to reduce their taxable estates, are offered tax deductions in most states. Contributors can accumulate to the limit of five annual gift tax exclusions on top of each year; this is stipulated in the qualified tuition rules. Up to $65,000 can be contributed by a single qualified tuition program in 2010 without creating a gift tax, provided the money does not exceed the amount necessary for the kids to finish their advanced education. Married couples can double that amount.
It is important to note that these limits are only applied per plan. You can contribute up to $120,000 to several different beneficiaries in a single year if you are a couple. The beneficiary is not necessarily expected to be a biological grandchild. In fact, it is not mandatory that the beneficiary be a relation of the contributor. An older couple can even opt to donate the amount to their neighbor’s kid.
The main set back of the qualified tuition programs is the penalty tax that any earnings included in any plan distribution not qualified for education costs is subjected to. Equally subjected to the same treatment are the nonqualified distributions which are handled as early distributions from retirement plans or annuity, which are both assessed a 10% early distributions penalty as well as counted as taxable income. However, the income and the penalty are only assessed on the earnings. A major factor for donors to think about is that any tax penalty only applies to the plan beneficiary and not the contributor.