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Saving for College: Tax Breaks and Strategies Your Family Should Know

As higher education costs continue to rise, you may be concerned about how to save and pay for college. Fortunately, several tools and strategies offered in the U.S. tax code may help ease the financial burden. Below is an overview of some of the most beneficial tax breaks and planning options for funding your child’s or grandchild’s education.

Qualified tuition programs or 529 plans

A 529 plan allows you to buy tuition credits or contribute to an account set up to meet your child’s future higher education expenses. State governments or private institutions establish 529 plans.

Contributions aren’t deductible. They’re treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($19,000 in 2025). If you contribute more than the annual exclusion limit for the year, you can elect to treat the gift as if it is spread out over five years. By taking advantage of the five-year gift tax election, a grandparent (or anyone else) can contribute up to $95,000 ($19,000 × 5) per beneficiary this year, free of gift tax.

Earnings on 529 plan contributions accumulate tax-free until the education costs are paid with the funds. Distributions […]

By Linkenheimer LLP|2025-01-15T17:46:34+00:00January 15th, 2025|child, children, college tax credit|0 Comments

The Kiddie Tax Could Affect Your Children Until They’re Young Adults

The so-called “kiddie tax” can cause some of a child’s unearned income to be taxed at the parent’s higher marginal federal income tax rates instead of at the usually much lower rates that a child would otherwise pay. For purposes of this federal income tax provision, a “child” can be up to 23 years old. So, the kiddie tax can potentially affect young adults as well as kids.

Kiddie tax basics

Perhaps the most important thing to know about this poorly understood provision is that, for a student, the kiddie tax can be an issue until the year that he or she turns age 24. For that year and future years, your child is finally kiddie-tax-exempt.

The kiddie tax is only assessed on a child’s (or young adult’s) unearned income. That usually means interest, dividends and capital gains. These types of income often come from custodial accounts that parents and grandparents set up and fund for younger children.

Earned income from a job or self-employment is never subject to the kiddie tax.

Calculating the tax

To determine the kiddie tax, first add up the child’s (or young adult’s) net earned income and net unearned income. Then subtract the allowable […]

By Linkenheimer LLP|2024-01-12T17:56:39+00:00January 12th, 2024|children, tax|0 Comments