06 Aug What’s the best way to help pay for college for grandsons?

Q. I am helping to pay for college for my grandsons. Which is the best for me tax-wise: sending checks to the college, depositing the funds in 529 plans or giving the money directly to the students or their parents? I don’t want to hurt their eligibility for scholarships or financial aid. I live in Pennsylvania and the kids are in New Jersey.
— Grandma

A. You didn’t say how old your grandsons are, and that’s important.

So is the amount of money you’re giving, your income, your tax rate and more.

But generally, it seems like funding a 529 plan could be the best option. Here’s more on each of your choices.

Paying tuition directly to the college will help you avoid gift taxes, said Deva Panambur, a certified financial planner with Sarsi, LLC in West New York. and adjunct professor of personal finance at Montclair State University.

He said IRS rules allow you to make a gift of $15,000, or $30,000 per married couple, without having to report it in your tax filings.

Paying tuition to the educational institution directly will allow you to avoid this limit, Panambur said.

“However, this option will negatively affect your grandchild’s ability to get student aid, in some cases dollar for dollar, of the amount you help with,” he said. “This may not be a concern if you plan on paying for all four years of college education or you can time the payment in the junior or senior year, when the financial aid application would not be impacted.”

Contributing to a 529 plan for your grandchild offers several advantages and Pennsylvania has one of the most consumer friendly 529 laws.

IRS rules allows you to contribute up to $15,000 per year or $30,000 for married couples without having to report it, Panambur said. You can also “superfund” five years of contributions – $75,000 or $150,000 between couples – in one year.

“You can also get state tax deduction up to $15,000 per year or $30,000 for married couples in the state of Pennsylvania,” he said.

In a 529 plan, funds grow tax free and distributions are not taxed if used for eligible educational expenses, he said.

“Grandparent-owned 529 plans are not considered as assets in college aid applications, however, distributions are considered as untaxed student income and can impact aid up to 50 percent of the distribution,” Panambur said. “To get around this, you can either fund a parent-owned 529 plan – which has a lower impact on college aid – or time the withdrawal in the junior or senior year when it would not impact aid application.”

If you give a gift to the parent or your grandchild, the same gift tax rules will apply.

But if you make the gift to your grandchild, it will be counted as income for college aid application and reduce aid by 50 percent, he said.

“Making the gift to the parent will avoid it being counted as income,” he said. “However, both options can count as assets if the gift is made well in advance of the application.”

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This story was originally published August 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.