Tax question on gifts to grandkids

[mystang52]

DW and I are considering gifting some money each year for each of our 4 grandkid's college funds. Oldest is 6 years old, youngest will be here in March 2018.
Anyway, if we withdrew money from our tax deferred accounts and deposited them into their 529 - or whatever they're called -accounts, is it still taxable income for us? Are there any legal ways to minimize tax impact?

 

[youbet]

The funds you withdraw from your tax deferred accounts will be taxable.

 

[Blue Collar Guy]

DW and I are considering gifting some money each year for each of our 4 grandkid's college funds. Oldest is 6 years old, youngest will be here in March 2018.
Anyway, if we withdrew money from our tax deferred accounts and deposited them into their 529 - or whatever they're called -accounts, is it still taxable income for us? Are there any legal ways to minimize tax impact?

Will people even be paying for college in 20 years? Maybe the private ones, but I see a trend on free public college, its here in my state already, the rest are sure to follow. Leave the grand kids post tax money, they get the stepped up value.

 

[EastWest Gal]

Will people even be paying for college in 20 years? Maybe the private ones, but I see a trend on free public college, its here in my state already, the rest are sure to follow. Leave the grand kids post tax money, they get the stepped up value.

There will always be living expenses. College was tuition free when I went to UC Berkeley and UCLA, but they still charged fees. Medical school was expensive, even without "tuition" since there was no time to work and we had to drive to the various hospitals. Add housing, textbooks, and so on, there will always be some costs.

 

[SecondCor521]

DW and I are considering gifting some money each year for each of our 4 grandkid's college funds. Oldest is 6 years old, youngest will be here in March 2018.
Anyway, if we withdrew money from our tax deferred accounts and deposited them into their 529 - or whatever they're called -accounts, is it still taxable income for us? Are there any legal ways to minimize tax impact?

If you can give them after-tax money, then you can give up to $14,000 per person per year without any tax consequences. (That $14K number rises with inflation over time.) Note that this is per giver-recipient pair, so you could give $14K to GK#1 and your wife could give $14K to GK#1 each year; similarly for the other GKs.

Apart from this, you are allowed to pay for college costs directly with no tax consequences. So if GK#2 sends you his/her freshman tuition bill and you write a check to the college, that doesn't count towards his/her $14K that year. I believe the same is true of medical expenses.

I know of no way to withdraw money from tax deferred savings without it being taxable income to you. Well, there is sort of one roundabout way called QCD's. If you are giving money to charities from your post-tax funds, you could instead do a QCD from your IRA to the charity and then give the post-tax money to the GKs. The QCD would not be deductible as a charitable contribution, but you also would not pay income tax on the QCD.

 

[Neill]

Not directly what you asked but I gift my kids appreciated stock each year. They sell it and don't pay any tax. We have 529's as well already. My kids have many years left before college.
You can only shield a couple of thousand per kid from tax because of the kiddie tax. Even so their marginal rate is still lower than mine if I did get hit with the kiddie tax. It hellishly complex at tax time though.

 

[gauss]

Not directly what you asked but I gift my kids appreciated stock each year. They sell it and don't pay any tax. We have 529's as well already. My kids have many years left before college.
You can only shield a couple of thousand per kid from tax because of the kiddie tax. Even so their marginal rate is still lower than mine if I did get hit with the kiddie tax. It hellishly complex at tax time though.

Just to be explicit...

I suspect that your kids don't pay tax on the sales because they are low income and thus the 0% LT Cap Gains rate applies to them.

If they sold enough stock in one year or had other income then they may in general need to pay taxes.

-gauss

 

[Neill]

Just to be explicit...

I suspect that your kids don't pay tax on the sales because they are low income and thus the 0% LT Cap Gains rate applies to them.

If they sold enough stock in one year or had other income then they may in general need to pay taxes.

-gauss

Yes you're correct but it's actually worse than the 0% LT cap gains. Because they are minors the kiddie tax makes their income taxable at my marginal rate at about $2k in gains.

 

[Dash man]

Will people even be paying for college in 20 years? Maybe the private ones, but I see a trend on free public college, its here in my state already, the rest are sure to follow. Leave the grand kids post tax money, they get the stepped up value.

Living expenses, books and fees will never be free.
As far as tuition, payments by grandparents paid directly to the school avoids gift tax and prevents the grandkids from blowing it on a new car. With 529 plans you still own the money and can designate their parent to be custodian if you pass that will make sure it's used as intended.

 

[Sunset]

Not directly what you asked but I gift my kids appreciated stock each year. They sell it and don't pay any tax. We have 529's as well already. My kids have many years left before college.
You can only shield a couple of thousand per kid from tax because of the kiddie tax. Even so their marginal rate is still lower than mine if I did get hit with the kiddie tax. It hellishly complex at tax time though.

Since I'm dense, can you explain how you gift appreciated stock ?

I was not aware I could say to my brokerage firm, transfer 50 shares of "A" to Johnny here is his account info.

How does it make it complex at tax time ?

 

[RunningBum]

Since I'm dense, can you explain how you gift appreciated stock ?

I was not aware I could say to my brokerage firm, transfer 50 shares of "A" to Johnny here is his account info.

How does it make it complex at tax time ?

I looked and Vanguard has a form to do just this, s209.pdf is the file name but I don't recall what I searched for to find it. I assume other brokerages can as well but I don't know.

 

[RunningBum]

Note that the basis isn't reset when you do this. The assumption of the advantage is that you gift it to someone that is in the 15% or lower bracket so that they can sell it with no tax due. I don't think that works for children under 14.

 

[bingybear]

Since I'm dense, can you explain how you gift appreciated stock ?

I was not aware I could say to my brokerage firm, transfer 50 shares of "A" to Johnny here is his account info.

How does it make it complex at tax time ?

I did this at Fido maybe a decade ago. I forget if I did this with a representative or not. But I selected a number of shares in my account and had them moved to my son's account. The basis info follows the shares, but I copied the info as brokers didn't track them as much back then. The stock value was just under the gift tax exemption, so no issue there. My son handled the capital gains tax when he sold them. It really is just making sure the recipient gets the correct basis for the the given shares and dates for the stock acquisition. If kiddie tax is involved, that must be taken into account.