5 ways to give grandkids money

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Money is the holiday gift that always fits.

If you are thinking about giving some to your grandchildren this holiday season, here are some suggestions for avoiding tax penalties. Much of the advice comes from a new book, “Life, Family, Wealth and Business After 55” by the certified public accountants and the certified financial planners at Palisades Hudson Financial Group.

Write a check. If you’re handing over $25 or $50, Uncle Sam’s gift tax probably won’t be a concern, but if you are giving more — to help pay for a big purchase like a house, for instance — there are limits on how much you can give without encountering federal gift taxes. In 2014 and 2015, you can give $14,000 per recipient. Together you and your spouse can make a $28,000 gift to the same person this year without triggering a gift tax.

Palisades Hudson notes that gift amounts that are under the annual exclusion do not count as taxable gifts in the view of the IRS and don’t eat into your lifetime exemption amount. “You can make gifts of amounts up to the annual exclusion each year for decades and still have your full lifetime exemption amount available to offset your estate tax at your death,” the book says, making these gifts a powerful estate-planning tool.

Pay for medical expenses. You can pay an unlimited amount of someone’s health care costs directly without incurring a liability for gift taxes, as long as you make the payments directly to an insurance company, the hospital or the health care provider — a doctor or dentist, for instance — giving the care. Paying to straighten a teen’s teeth may not seem like a glamorous gift from grandma, but it would certainly be appreciated.

Pay tuition. You can make tuition payments directly to a school on behalf of your grandchild (or anyone) in unlimited amounts, gift-tax free. Palisades Hudson notes that this exception does not apply to room and board, activity fees, book fees and similar expenses.

Give a gift with strings. If you put a gift to grandchildren through a custodial account — Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) — you keep control on how they spend it until they turn 21. If the money in the account earns more than $2,000 a year in interest, the child may have to pay taxes on it at their parent’s tax rate, so if you are going to set up one of these accounts for a grandchild, Palisades Hudson suggests discussing it first with the child’s parents.

Set up or contribute to a 529 educational savings account. When a grandparent sets one of these up for a grandchild, all earnings and capital gains within the account grow tax free, similar to the way an IRA does. Withdrawals from the account are not taxable as long as they are used to pay for qualified education expenses such as tuition, room and board and student activities fees. Many states also provide an income tax deduction for these contributions. Money placed in a 529 account are generally subject to gift tax limits; however, 529s also permit lump-sum contributions of up to $70,000 spread evenly over the subsequent five years. If you make no other gifts to the same beneficiary in the five-year period, you won’t trigger gift taxes.

Here’s some more advice about helping your grandchildren pay for college.