Using Money Gifted from Child to Contribute to Child's 529 and Reduce Tax Burden

[Dr. Intentionality]

Hello All,

Not sure if this is possible... would a child be able to gift their parents money and then the parents use that money to contribute to the child's 529 account in a state that offers tax deductions for 529 contributions? Essentially, the child would be contributing to their own college savings and the parents would be able to save some state tax.

Thanks!

[MPMD]

you mean could they gift like birthday money to the parents?

you only get tax breaks on earned income placed into a 529. if someone gifts you money you don't have to pay taxes on it. so this probably wouldn't end up doing much for you.

[CordMcNally]

Do they have other earned income?

[Peds]

sorry child like a 1 yo? dont know if thats ethical to take the kids money, force it to be used for college, and then you claim the tax deduction....

or do you mean yourself, a child to your parents?

[Lordosis]

sorry child like a 1 yo? dont know if thats ethical to take the kids money, force it to be used for college, and then you claim the tax deduction....

or do you mean yourself, a child to your parents?

Its like taking candy from a baby

[Dr. Intentionality]

Do they have other earned income?

The $7K is earned income made by the student. The parents also have earned income.

sorry child like a 1 yo? dont know if thats ethical to take the kids money, force it to be used for college, and then you claim the tax deduction....

or do you mean yourself, a child to your parents?

I'm referring to a student (the child in this case) currently in college who wants to use all of their savings to pay for their education.

[Dr. Intentionality]

you mean could they gift like birthday money to the parents?

you only get tax breaks on earned income placed into a 529. if someone gifts you money you don't have to pay taxes on it. so this probably wouldn't end up doing much for you.

If the parents receive a gift from the child student, could the parents not contribute an equivalent amount of earned income to the student's 529 and claim the deduction (regardless of whether the money was earned or not)?

[Peds]

The $7K is earned income made by the student. The parents also have earned income.


I'm referring to a student (the child in this case) currently in college who wants to use all of their savings to pay for their education.

so yes. they give you a gift <15K.
you place 7K in a 529 in their name (this is a gift <15K).
you get to claim the tax deduction since you are a working MD (assumed).

i would rather place 6K in a rIRA for the person than fret about some measly tax savings on a 529.

[Dr. Intentionality]

so yes. they give you a gift <15K.
you place 7K in a 529 in their name (this is a gift <15K).
you get to claim the tax deduction since you are a working MD (assumed).

i would rather place 6K in a rIRA for the person than fret about some measly tax savings on a 529.

Thank you! I agree with the Roth IRA... but the student will be utilizing all of the funds for their education within the next two years so any guaranteed tax benefit likely outweighs the potential for growth within that short time frame.

This discussion has brought another question to mind though... what do you recommend parents do with gift money their young children receive growing up if they have no earned income? Set up a custodial 529?... would a child be able to contribute their gift money to a custodial 529 since it wasn't earned?

[CordMcNally]

Thank you! I agree with the Roth IRA... but the student will be utilizing all of the funds for their education within the next two years so any guaranteed tax benefit likely outweighs the potential for growth within that short time frame.

You would tried a marginal current tax benefit for decades of tax free growth. I know which one I would choose.

[Dr. Intentionality]

You would tried a marginal current tax benefit for decades of tax free growth. I know which one I would choose.

It's the student's money... so it's either they use it for their education and take out less loans or put it in a Roth IRA and take out more loans. They want to minimize their debt by using all their assets, so tax savings for the parents is just an additional benefit.

[Larry Ragman]

Thank you! I agree with the Roth IRA... but the student will be utilizing all of the funds for their education within the next two years so any guaranteed tax benefit likely outweighs the potential for growth within that short time frame.

This discussion has brought another question to mind though... what do you recommend parents do with gift money their young children receive growing up if they have no earned income? Set up a custodial 529?... would a child be able to contribute their gift money to a custodial 529 since it wasn't earned?

Well, what I did was dump any monies received by the kids while they were young into a UTMA account. It worked out to about $3k for each of them. Then when they hit 18 I told them where it was and we jointly worked out a plan for the funds. Good life time investment training.