In addition to the Section 529 Plans to save money for college education costs, there is the Uniform Transfers to Minors Act, also known as Uniform Gifts to Minors Act.
Especially for younger children, the Uniform Gifts to Minors Act can be a way to shift income from parent’s high tax bracket (rate) to the child’s low or no tax bracket.
Basically, the Act sets up a simple way for the parents to make gifts to the child and the money is invested. The parents control the investments, but when the child attains age 18 (or 21 years old in some states), the total fund must be turned over to the child.
As you know, parents can give the child $14,000 total gifts in a calendar year, and it is too small to require a Gift Tax Return, Form 709. Each parent can do that, so if both parents give $14,000, the total invested can be $28,000.
If the money is invested in stocks that pay dividends, the dividend income will probably be tax-free as qualified dividends.
If a stock is sold after it has been owned for more than a year, the gain will be long term capital gain. That is also tax-free to low-income taxpayers, like the child, as long as the total taxable income on the child’s return is less than $37,450.
The Section 529 Plan is a little better for being eligible for federal financial aid. The 529 Plan will be counted as owned by the parents for figuring federal grants. The money in the Uniform Gifts to Minors Act count as more assets available to the child and can reduce the financial grants more than the Section 529 Plan assets do.
A problem came up where a client saved money for many years for the child using the Uniform Gifts to Minors Act. When the child turned 18 years old, the child was entitled to the full amount, whether they went to college or not.
You may have heard of problems for some college students where they had a large amount of money to pay for college and did not study much, they were a poor student just having a good time.
I personally favor giving the child help with college expenses, one semester or quarter at a time. If they do well, then go ahead and help pay for the next semester or quarter. That way the child really sort of earns the support by doing well in the classes.
However you choose to save and help pay for the child’s college education, consider the savings of going to community college for the first year or so. The cost of a credit for community college might be only $84, but the University of Nevada, Reno credit could cost can be more than $200. The community college classes count for satisfying the UNR graduation, just like UNR classes do. The community college instructors may be as good or better as the UNR instructors and the classes might be smaller size.
Did you hear? “If you don’t have a plan ‘B,’ you don’t have a plan.” — Adam Bryant
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.
