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How does the annual gift tax exclusion apply to contributions to a 529 plan?

Answer:

All contributions to 529 plans are considered present interest gifts and qualify for the annual federal gift tax exclusion. This means that you can contribute up to $13,000 per year, per beneficiary without incurring federal gift tax. So, if you contribute $15,000 to your son's 529 plan in a given year, for example, you'd ordinarily apply this gift against your $13,000 annual gift tax exclusion. The remaining $2,000 would be a taxable gift and you'd report it on a federal gift tax return.

However, you can elect to treat large contributions (up to $65,000 in a given year) as if made evenly over a five-year period. You make this election on your federal gift tax return (which you must file if your gift is over $13,000). For example, if you make a $65,000 contribution and make the election, your contribution will be treated as if you'd made a $13,000 gift for each of five years.

Although your gifts over $13,000 in a year are taxable gifts, you may not actually write a check for the tax. Remember that you must use up your $1 million applicable exclusion amount before you'd be liable for an out-of-pocket payment for the gift tax.



Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011