Planning for Higher Education

Federal tax laws provide a number of options to reduce estate, gift, or income taxes in providing for a person’s education. For example, the law allows you to pay a student’s tuition directly to his or her school without gift tax consequences.

When it comes to tax planning, you might have heard that 529 Plans are very attractive options for tax savings. This device is outlined in Section 529 of the Federal Tax Code, and allows earnings on contributions toward a person’s education to accumulate free of taxes until the funds are withdrawn. As a general matter, 529 Plan earnings are tax-free as long as they are used for the purposes of qualified higher education expenses. This can provide great advantages, especially for taxpayers in a high tax bracket. You can withdraw funds in a 529 Plan account without incurring federal taxes, as long as the money is withdrawn to pay for qualified higher education expenses. If the funds are used for other purposes, the earnings portion of the withdrawal is subject to ordinary federal income tax, any applicable state income tax, as well as an additional 10% federal penalty.

Because the government recognizes the importance of saving for higher education costs, 529 Plans qualify for special gift tax exclusion. You can contribute up to the annual per-donee gift tax exclusion of $13,000 ($26,000 for married couples) per beneficiary, free of tax. If the total contribution is greater than the $13,000 (or $26,000) per-donee exclusion amount, the donor can elect to have the aggregate amount ratably extended over a five-year term, for gift tax purposes. Therefore, a married couple could possibly donate as much as $120,000 at one time. As far as your estate taxes are concerned, remember that this lifetime gifting excludes the 529 contribution amount from your gross estate, reducing estate tax liability.

Many clients seeking estate planning find 529 Plans to be an attractive planning device, not only because they provide an excellent college savings plan, but because they afford the donors a great deal of control. Clients instituting a 529 Plan can maintain control over the money that is funding the plan, by, for instance, choosing when distributions are to be made and electing investment strategies. They can even change the plan’s beneficiary (subject to some restrictions).

The Houston Estate Planning attorneys at Garg & Associates are available to assist you with all of your lifetime gifting and testamentary needs, and can answer any question you have about the process. Come visit us today to discuss qualified tuition plans and other lifetime gifting options which can benefit future generations of your family while simultaneously providing you with substantial tax advantages.

We invite you to contact us for a consultation. Call Garg & Associates, PC at 281-362-2865 or complete our contact form.

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Garg & Associates, PC | 21 Waterway Avenue, Suite 300 | The Woodlands, Texas 77380 Please call 281-362-2865 | Fax: 866-743-4506
Serving The Woodlands, Spring, Houston, Conroe, Kingwood, Tomball, Cypress, Huntsville, Cleveland, Stafford, Montgomery County, Harris County, West Oaks, Memorial, Sugar
Land, River Oaks, Alief, Stafford, Missouri City, and Southwest Houston Texas.