As we head into the holiday season it’s easy to find ourselves becoming increasingly cynical; the overstocked shelves, the avalanche of television ads and the crazy behavior of harried parents as they strive to fill Christmas lists with toys so sophisticated that in days gone by they could have sent a rocket to the moon!
Given that cynicism, it’s no surprise that we begin to look for something more meaningful to give to our grandchildren something that will help them now and in the future --- something that will make a difference.
As our children marry later, choose to have children in their later 30’s or to start a second family in their 50’s, the expectation that as grandparents we will be around to help with college expenses and to attend our grandchild’s college graduation become more and more remote.
To plan for that many of us will add to our retirement planning the funds required to assist our grandchildren with college should we be there to see it or not.
There is, however, another option, one that will not only allow you to make a significant difference to the future of your grandchild, but to make that difference right now and it’s easy: cover the cost of their private school education!
It’s a proven fact children that attend private schools score higher on tests, are most self-motivated and are more likely to be accepted to a college or top 100 universities. They also head the list for scholarships and following graduation will go on to earn substantially more than their non-degree holding peers.
A further not so well documented advantage to this planning, but visible every day at Florida Prep, is the opportunity for grandparents to become involved in the lives of their grandchildren, to see them learn, grow and play in an environment that encourages the support of the entire family.
Whether it be a science fair, the international festival (where grandma’s dish from the homeland was a major hit) or attending the school field day, your entire family is made welcome on the Florida Prep campus and unlike large faceless public schools, our staff will know your family and your student.
For information regarding the admissions process at Florida Prep call today to speak to our admissions department of review the Admissions section of the website.
To learn more about the financial planning options available to you we have shared an article originally run on the website Investopedia. We would urge you to speak to a qualified financial consultant before proceeding, however, we found it interesting and decided to include it here below the following line.
Tax-Advantaged Ways to Pay for College Prep
Oct 31, 2019
TABLE OF CONTENTS
There are distinct benefits to grandparents paying for early education for their grandchildren. Most nanas and pop-pops have probably heard about the benefits of funding a 529 account, which helps pay off those formidable college costs by allowing their issue’s issue to draw from it tax-free. But the bills for private prep schools can be a struggle too.
- There are tax-advantaged ways for grandparents to help their grandkids out with education expenses, even preschool.
- These techniques help out your children with expenses and help your family overall by reducing the size of your estate, therefore limiting the likelihood of ever being charged an estate tax.
- You can tax advantage of the gift tax exemption, in which gifts of up to $15,000 (per 2019 rules) can be made without the amount of the gift having to be added to your lifetime estate and gift tax limits.
- You can also avoid the gift tax issue altogether by paying the education costs directly to the program; no taxes are due when payment is for qualified education expenses.
- You can also start a Coverdell Education Savings Account (ESA) for your grandchild, although the donation limits are fairly low and your income cannot exceed specified levels.
The Benefits of Paying
Thankfully, the Internal Revenue Service (IRS) offers some nice incentives for grandparents who want to help with early education. Taking advantage of these provisions can stretch each dollar you spend, not to mention shield your assets from the taxman when your estate gets passed along to your heirs.
A special I.R.S. rule allows givers to spread their one-time gifts across five years worth of gift-tax exemptions, without the money being counted toward the lifetime estate and gift tax limit; meaning, a grandparent can pay $75,000 in one year and count it as having been paid over five years.
The Gift-Tax Exemption
Ordinarily, a taxpayer can only confer $15,000 a year to each grandchild (or anyone else, for that matter) without triggering the gift tax. The limit is per person, meaning a couple can give $30,000 per year to each grandchild. Granted, the gift tax doesn't have to be paid immediately, and in some cases, it doesn't have to be paid ever. The amount of money gifted that surpasses the $15,000 limit is counted toward the lifetime exemption from gift and estate taxes. In 2019, the exemption is $11.4 million. That limit, however, doesn’t apply if you pay your grandchild’s school directly to cover tuition fees. This "education exemption" is a great way for individuals to contribute toward those steep private-education costs.
For older adults with extensive assets, it’s an excellent estate-planning tool, as well. (For more, see What Are Gift Taxes?) Any money you give to your grandkids now helps reduce the size of your estate for tax purposes. That can make a difference for the wealthiest Americans, given that the government takes up to 40% of any estate larger than $11.4 million. Even though your heirs don’t pay the taxes directly, you’re doing them a huge favor by staying under that threshold.
It’s also important to keep in mind that the exemption only works for qualified tuition costs. It won’t apply for ancillary expenses, such as books and supplies.
If the child enrolls in a school that requires a contract, experts caution that the person paying the bill – even if it’s a grandparent – should be the one who signs it. Otherwise, the IRS may argue that the grandparent is making a taxable gift to the parent, even if that’s not the case.
It’s also important to keep in mind that the exemption only works for qualified tuition costs. It won’t apply for ancillary expenses, such as books and supplies
Many savvy grandparents know about 529 college savings plans, but there’s another, more flexible option that sometimes flies under the radar. With a Coverdell Education Savings Account (ESA), you can help your grandkids save not just for college but also for elementary and secondary schools. As with a 529 plan, beneficiaries can withdraw the money tax-free for qualified expenses. However, ESAs tend to offer more investment options and lower costs. (For more, see College Savings Plans: Funding a 529 or Coverdell?)
One stumbling block is the fairly low-income limits for Coverdell plans. For 2019, you can contribute up to $2,000 a year toward a grandkid’s account, but only if your modified adjusted gross income is under $95,000 a year – or $190,000 if you file a joint return. At that point, the allowance starts to taper off. Those whose modified adjusted gross income exceeds $110,000 – $220,000 if filing jointly – are completely prohibited from making a contribution.
However, there is a fairly easy workaround. Simply gift the money to your grandchildren and have them open an ESA on their own. By allowing them to save in advance for a private school in a tax-advantaged way, you’re getting more out of each dollar you spend. What’s more, this is another way to shrink the size of your estate, which can help affluent families steer clear of the dreaded estate tax.
The Bottom Line
The IRS has a couple of provisions that benefit grandparents who want to help pay for private schools. Taking advantage of these carveouts can help shrink your tax bill, both now and in the future. If you're paying tuition directly, just be sure that the school qualifies for the gift-tax exemption.