Forward Bank

As colleges and universities grapple with reopening during the COVID-19 pandemic, a growing number of college students and their parents find themselves struggling to pay tuition costs. In fact, a recent study found that nearly half of all college undergraduates said they need to “figure out a new way to pay for school” due to the impact of the pandemic on their finances.¹

Fortunately, there are a number of tax-smart ways for parents and grandparents to help family members pay for college. However, before reaching into your own pocket, look into programs designed to help. These include emergency cash grants under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as the ability to apply for or appeal an existing federal student aid application, if financial circumstances have changed.

Remember, if you are in or nearing retirement, it’s important to find the right balance between providing assistance and maintaining your own safety net, so you’re not over-extending yourself at a time when portfolio values may be impacted by ongoing market volatility. Next, determine the right tax-smart strategy for your situation, which may include one of the following. 

1. Annual gifts: In 2020, you can give $15,000 to as many different people as you wish, under the annual gift tax exclusion ($30,000 for married couples filing joint returns), before bumping up against the lifetime gift tax exemption amount, which is $11.58 million per person ($23.16 million for married couples filing joint returns) in 2020. In certain cases, gifting can be enhanced by giving appreciated stock rather than cash. Since the gift is based on the fair market value of the asset you transfer, you don’t pay capital gains tax on the appreciation.
   
   
2. Direct payments to educational institutions: Instead of giving the money to the student, you can make a payment directly to the college or university. As long as you make the payment directly to the school, it is not considered a gift under the gift tax rules, so it won’t count toward your annual exclusion or require you to file a gift tax return. 
   
   
3. 529 plans: 529 plans offer a tax-smart way to pay for qualified college, K-12, and continuing education costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits, such as five-year gift tax averaging and tax-free qualified distributions. Some states also offer state income tax incentives, so take time to research your state’s tax treatment first. 

Consult your tax and financial professionals before implementing these or other strategies. To learn more, call Forward Investment Services today to schedule time to talk.