There are distinct benefits to grandparents paying for early education for their grandchildren. Most nanas and pop-pops have probably heard about the benefits of funding a 529 account. This type of account helps pay off those formidable education costs by allowing their issue’s issue to draw from it tax-free to pay for tuition, books, supplies, and fees at a variety of colleges, universities, and vocational and trade schools.

But the bills for private preschools and elementary schools can be scary, too. It’s especially true in some of the nation’s larger cities, where fees can exceed those of in-state colleges. In New York City, for example, some of the more exclusive primary schools can cost more than $30,000 a year.

The Tax Cuts and Jobs Act of 2017 along with the Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, which was signed into law on Dec. 20, 2019, both expanded 529 plan qualified expenses. However, 529 plan funds cannot be used for preschool and daycare services.

The Benefits of Paying

Thankfully, the Internal Revenue Service 🌜(IRS) offers some nice incentives for gra🍎ndparents who want to help with early education. Taking advantage of these provisions can stretch each dollar you spend, not to mention shield your assets from the taxman when your estate gets passed along to your heirs.

The Gift-Tax Exemption

Ordinarily, a taxpayer can only confer $17,000 a year for 2023 ($18,000 for 2024) to each grandchild (or anyone else, for that matter) without triggering the gift tax. The limit is per person, meaning a couple can give $34,000 for 2023 ($36,000 for 2024) per year to each grandchild.

Granted, the gift tax doesn't have to be paid immediately, and in some cases, it doesn't have to be paid ever. The amount of money gifted that surpasses the $17,000 limit for 2023 ($18,000 for 2024) is counted toward the lifetime exemption from gift and estate taxes. In 2023, the exemption was $12.92 million ($13.61 million for 2024).

That limit, however, doesn’t apply if you pay your grandchild’s school directly to cover 澳洲幸运5官方开奖结果体彩网:tuition fees. This "education exemption" is a great way for individuals to contribute toward those steep private education costs.

For older adults with extensive assets, it’s an excellent 澳洲幸运5官方开奖结果体彩网:estate-planning tool, as well. Any money you give to your grandkids now helps reduce the size of your estate for tax purposes. That can make a difference for the wealthiest Americans, given that the government takes up to 40% of any estate larger than $12.92 million for 2023 ($13.61 million for 2024). Even though your heirs don’t pay the taxes directly, you’re doing them a huge favor by staying under that threshold.

The Preschool Factor

In theory, grandparents can use the education exemption to cover preschool bills, too. But this is where things get a little dicey. If the preschool is more of a childcare facility than an educational institution, you’re out of luck. According to the IRS Form 709: “A qualifying educational organization is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.”

So if you plan to pay tuition in a high-cost part of the country, make sure to find a school that fits the criteria. It’s also important to keep in mind that the exemption only works for qualified tuition costs. It won’t apply to ancillary expenses, such as🌳 books and supplওies. 

If the child enrolls in a school that requires a contract, experts caution that the person paying the bill—even if it’s a grandparent—should be the one who signs it. Otherwise, the IRS may argue that the grandparent is mak𓆏ing a taxable gift to the parent, even if that’s not the case. 

Coverdell ESAs

Many savvy grandparents know about 529 college savings plans, but there’s another, more flexible option that sometimes flies under the radar. With a Coverdell Education Savings Account (ESA), you can help your grandkids save not just for college but also for tuition and other related items for elementary and secondary schools.

If you gift money to a 529 plan, beneficiaries can withdraw the money tax-free for qualified educational expenses, which now include using up to $10,000 to pay off student loans, thanks to the SECURE Act. In addition, the law expanded 529 plans to include expenses related to apprenticeship programs. However, ESAs tend to offer more investment options and lower costs.

One stumbling block is the fairly low income limits for Coverdell plans. For 2024, you can contribute up to $2,000 a year toward a grandkid’s account. According to the IRS, if your modified 澳洲幸运5官方开奖结果体彩网:adjusted gross income is between $95,000 and $110,000 a year—or $190,000 and $220,000 if you file a joint return, your contribution limit will be gradually reduced. At that point, the allowance starts to taper off. Those whose modified adjusted gross income exceeds $110,000—$220,000 if filing jointly—are completely prohibited from contributing. 

However, there is a fairly easy workaround. Simply gift the money to your grandchildren and have them open an ESA on their own. By allowing them to save in advance for a private school in a 澳洲幸运5官方开奖结果体彩网:tax-advantaged way, you’re getting more out of each dollar you spend. What’s more, this is another way to shrink the💦 size of your estate, which can help affluent families 🍌steer clear of the dreaded estate tax.

The Bottom Line

The IRS has a few of provisions that benefit grandparents who want to help pay for private preschool and elementary school. Taking advantage of these carveouts can help shrink your tax bill, both now and in the future. If you're paying tuition directly, just be sure that the school qualifies for the gift-tax exemption.