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
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