Education
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Posted on November 9th, 2024
We’re diving into gift tax rules and 529 plans to help you maximize your contributions without triggering gift tax.
Although 529 plans don’t have annual contribution limits like Roth IRAs or 401(k)s, contributing large amounts to your child’s 529 plan might raise concerns about potential gift tax obligations.
Gift tax in the United States is a federal tax applied to the transfer of assets or money from one person (the donor) to another (the beneficiary) without receiving something of equal value in return. The tax primarily affects high-net-worth individuals making substantial gifts, including 529 contributions. Certain exclusions and exemptions allow many people to avoid paying gift tax altogether.
Contributing to a 529 plan, or giving gifts in general, doesn’t necessarily mean you’ll need to pay gift tax. The IRS allows an annual exclusion amount for gifts, enabling donors to give a certain amount each year without incurring gift tax.
The IRS allows certain situations where you can give a gift over $19,000 without needing to file a gift tax return. These include:
In addition to the annual exclusion, there is a lifetime exemption amount that applies to total gifts made throughout a person’s life.
Superfunding allows donors to front-load up to five years of contributions into a 529 plan at once without incurring gift tax.
In most cases, gift tax isn’t a concern when saving for college with a 529 plan. However, if you’re in the fortunate position to contribute more than $19,000 per year, be sure to report and file a gift tax return to stay compliant.
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