If you're worried about saving money for your children's college educations, you should investigate Section 529 plans. These tax-favored accounts enable you to sock away money that can grow without current taxes. And the funds you withdraw to pay most college costs are also exempt from income tax.
But there's one catch. When you contribute money to a Section 529 account on behalf of a child or grandchild, the transfer is subject to gift tax rules. The current annual gift tax exclusion is $14,000 per recipient, or $28,000 for a joint gift by a married couple. If you give more than that amount, the excess will reduce your lifetime exemption from gift and estate taxes.
Fortunately, tax rules let you make a one-time contribution to a 529 plan that is treated as if you gave the money over five years. Thus, you can provide the equivalent of five years' worth of contributions in one year—so, up to $70,000, or $140,000 from a couple—without gift tax issues. You won't be able to give additional funds for five years without affecting your gift and estate tax exemption, but even those amounts might cover most or perhaps even all of a beneficiary's education costs.
Don't forget about this unique gift tax break when planning how to meet college expenses.
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