Minimizing Your Taxes and Managing Your Complex Affairs

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Gifts to Grandchildren - Where the grandkids are may impact your decision.

Many grandparents make large year-end gifts to their grandchildren’s education savings plans. These gifts are not tax deductible by the grandparent. Where your grandchild is may affect your gift decision.

I recently advised a grandparent not to make a large gift to her grandchild but to gift it to her son in Arizona. Her son could then make a gift to his daughter’s 529 education savings plan and receive tax benefits.

Arizona is one of the few states that allow a tax deduction for a contribution to any state's 529 plan (every state has different investment options) up to $4,000 for a married couple. Federal and California law don’t allow deductions to 529 plans.

 Under Tax reform,  you can withdraw up to $10,000 from a 529 plan for tuition to K-12 schools (Not every state has adopted this rule – so watch out as some states like California only allow 529 plans for college tuition).

So as an Arizona resident, if you make a contribution to a 529 plan you can essentially deduct up to $4,000 for private school tuition starting at kindergarten.

 The triple whammy for Arizona residents (this may not work in every state such as California):

 (1)   Tax deductible on Arizona return up to $4,000

(2)   Earnings in 529 plan grow tax-free for Federal and Arizona purposes

(3)   If taken out for education (which now includes K-12 and college), no tax is imposed on the withdrawal

If you are enjoying my tax and finance tips and would like to buy me a beverage

Richard Pon CPA, CFP