Understanding The Annual Federal 529 Gift Tax Exclusion

The annual federal 529 gift tax exclusion is available for parents and grandparents who make contributions to the section 529 plan on behalf of their child or grandchild. The amount is $12,000 (or $24,000 for married joint filers) per year, per child.



Simply stated, you can contribute up to $12,000 without incurring a federal gift tax. Any amount exceeding the 529 gift tax exclusion limit is considered a taxable gift and must be reported on your federal gift tax return.


Ways to Benefit from the 529 gift tax exclusion


There are ways to make large contributions as a 529 gift tax exclusion and avoid paying the gift tax. You can contribute one lump sum that is equal to five times the annual amount, up to $60,000 and still avoid the gift tax. The lump sum payment is treated as if you made the contributions evenly over a five year period. Any amount beyond the $60,000 within the same five year period is subject to the gift tax.


Another benefit to the 529 gift tax exclusion is that you can move assets from your estate that is otherwise taxable and still have ownership and control of those assets.


Misconceptions About the 529 gift tax exclusion


Parents and grandparents are often confused about the tax rules concerning the 529 gift tax exclusion. Some people assume that money given to someone for any purpose is taxable income that must be reported. The annual 529 gift tax exclusion is separate from income reported on your tax return. This income includes wages and profits from a business.


The gift tax is related to estate taxes that the government charges a person who dies with an excessive amount of money. Any person who dies in the United States with more than $2 million is charged a death tax if the excess amount goes to anyone other than their spouse.


The IRS has placed limits on the amount a person can gift to a person in one year. This is to prevent someone from giving away all of their money before they die to avoid paying estate tax. The current amount is $12,000 per recipient, per year. Any amount above the $12,000 is subtracted from the $2 million limit.


Another misconception many have about the 529 gift tax exclusion is that this amount is not taxed. The recipient of the gift amount that exceeds the estate tax exemption is taxed for that amount if you, the donor, are still alive and refuses to pay the gift tax.

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