We are full pay for a private LAC. I fully fund our 529 to take advantage of our state tax deduction up to the cap, then withdraw from the 529 to pay for school. I understand that for 2023, between the two of us we can fund the 529 up to $34K ($17K per individual) without incurring a gift tax. However, full pay for school exceeds that amount by tens of thousands, let’s round to $80K/yr. (Not looking for opinions on whether or not it’s worth it, we’ve saved over the years and are able to pay.)
I understand that in one calendar year I can contribute a maximum of $170K ($85K per individual) to the 529 and as far as gift tax goes, the IRS will treat that as spread out over five years as long as I don’t make any more contributions to the 529 in those five years. The thing is that I want to maximize the state deduction each year on 529 contributions, so it doesn’t make sense to me to make a one time contribution of $170K.
What I’d like to do is fund the 529 each year with $80K, of which a portion I can deduct on state taxes. That would leave the difference ($80K minus $34K) that I’d have to file the gift tax form with the IRS each year. As I understand it, those gift taxes do not need to be paid unless the total gifts to the beneficiary exceed $12,920,000 (2023 value set by the IRS) from the estate when the last one of us dies. This is not going to be an issue for us because unfortunately, we will be far far below that value. Do I just need to file the paperwork with the IRS and keep the copies until we die, and then we won’t ever have to pay any gift tax?
The part I’m confused about is where I’ve read that in the IRS’s eyes, any contribution in excess of the annual gift tax exclusion is treated as being spread out over five years. If so, does that mean I can’t make future contributions to the 529? This is for a 2026 college grad.
It’s funny you ask because I initially wrote my reason in the original post but then deleted that part before posting because I thought it might muddy things. I have a way to fund the 529 with a credit card that earns rewards, and the school does not accept credit cards as payment. So if I’m going to spend $80K then I’d really like to get some financial benefit from it. Plus I get a state income tax deduction on 529 contributions up to an annual cap of $31K.
Direct payments of tuition to the school don’t count as gifts, but 529 contributions do count as gifts. Why that is I don’t know.
As I understand it, you have to file the gift tax form every year your contribution is over $34k (or whatever the amount is for that year.) You don’t have to pay any tax.
529 contributions, not distributions, do count as gifts.
Ah I see. Well…if the contributions are considered a gift…really all that means is you have to complete the gift form annually…if this is a one time gift each year, it’s really easy to complete. There is no tax liability unless you exceed the over millions in lifetime gift amount in your lifetime.
So…if you are up for the completion of a form and keeping track of everything….go for it.
Total lifetime gifts in excess of annual exclusions, not “gifts to the beneficiary…”
This is not correct. Only certain gifts (maybe only gifts to 529 accounts?) can be spread over five years. You can contribute as much as you want to a 529 whenever you want (up to the plan maximum, of course), as long as you are ok with filing the IRS Gift Tax Return when required.
I took a look at Form 709 and it seems pretty straightforward. We’ve always done our own taxes before, but I think for 2023 we will hire a CPA just to make sure we’re doing things correctly.
It used to be unlimited in my state, until 2021 when a law was passed to place a cap on contributions effective Jan 2022. Unlucky timing for us since we had a graduating HS senior in 2022.
Gift of College gift cards are available to the general public at select retail locations and also online. There is a fee, and it’s a math problem to determine if the fee is worth it. I have a Hyatt credit card and spending on it helps reach elite status. So far being Hyatt Globalist is worth it for us, but of course that is a highly personal decision.
Do you buy $80k in gift cards? And then use the gift cards to make payments?
$6 surcharge for $200 in gift cards per the link is pretty typical industry standard charge, but that would be $2400 to pay an $80k tuition bill this way, right?
I would love an elite status on my airline, so no judgement here!