05 Apr Does N.J. give a tax break for paying down student loans?

Q. I am 75 years old. I withdrew $109,000 from my rollover IRA to pay down my two granddaughters’ student loans. Does New Jersey offer some credit to offset New Jersey taxes? It looks like I will have to give Uncle Sam some money.
— Grandparent

A. First, your granddaughters are lucky to have such a generous grandparent.

But unfortunately New Jersey does not offer any type of credit for paying off a student’s loan, so you will be paying both Uncle Sam and the state the related income taxes.

Since you have given each granddaughter more than the annual gift exclusion of $15,000 a person a year, you will also need to have a gift tax return prepared, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

Married individuals can each give $15,000, so if they do what is called a “split gift,” the annual gift exclusion amount is $30,000, he said.

“The good news is you likely won’t owe any gift taxes upon filing but it will reduce your unified credit which for 2021, is $11.7 million a person,” he said. “The unified credit and federal estate exemption are a shared cap of $11.7 million, which effectively means use of the unified credit during your lifetime lowers the federal estate exemption when you pass away.”

There are some other things to consider for any times in the future when you withdraw from an IRA.

The withdrawals are considered ordinary income, which means they can not only result in income taxes but potentially could increase Medicare Part B and D premiums and impact the taxability of Social Security income, Maye said.

“So for funding future goals or spending, if you had after-tax dollars, it might have made sense to fund them from the after-tax that bucket of assets or at least some portion of it,” Maye said.

Also, in terms of gifting, certain gifts are allowed in addition to the $15,000 annual exclusion.

“For example, the tax code allows anyone to pay the amount of tuition directly to a college without it being subject to gift tax rules,” he said. “Also, gifts paid for medical expenses paid directly to the care provider are not subject to gift taxes.”

You didn’t say how much of your retirement assets were used for this generous gift.

You should make sure you have left enough assets to fund your remaining years, which might be 20 years if you are healthy, Maye said.

He said you should consider consulting with an advisor who can discuss future planning and tax implications.

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This story was originally published on April 5, 2021.

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.