Tax breaks for helping grandchildren

Dear Liz: I am grandmother to two girls ages 10 and 14. I contribute to their Section 529 college funds and pay for expenses such as dental bills, dance lessons and so on. Is there a way I can deduct these contributions from my income tax?

Answer: Most states offer at least a partial tax deduction for 529 college plan contributions, said Mark Kantrowitz, publisher of the financial aid sites FinAid and FastWeb. The exceptions are California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and Tennessee, which have state income taxes but no deduction; and Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, which don’t have state income taxes.

To get a deduction, you typically have to contribute to the plan offered by your home state rather than ones offered by other states. For more details, visit www.finaid.org/savings/state529deductions.phtml.

In general, you can’t take deductions for other expenses paid on behalf of your grandchildren. (If they’re your dependents — they live with you and you provide more than half their support — you could claim exemptions and possibly tax credits, but that doesn’t sound like the case here.) However, any medical or tuition expenses you pay directly on their behalf don’t count toward your annual gift tax exclusion, as discussed here last week.

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Could son’s unpaid bills harm parents’ credit? Maybe

Dear Liz: Our 24-year-old son lives with us. He failed out of college, has been fired from two restaurant jobs and is working part time at a grocery warehouse. He has neglected to pay his credit card for several months. He also waits until his cellphone carrier threatens to turn off his phone before he pays half of that bill. We are concerned that his poor payment history may start to reflect on our good credit histories. We are retired and may want to build a new house. His bills are sent to our address, and creditors call our home phone number looking for him.

Answer: His debts shouldn’t affect your credit reports and scores unless you cosigned loans or other credit accounts or added him as a joint user to your credit cards.

Note the word “shouldn’t.” It’s possible that an unethical collection agency would try to get you to pay these bills by posting the overdue accounts on your credit reports. That could negatively affect your scores. Check your credit reports at least once a year at http://www.annualcreditreport.com. You also may want to consider ongoing credit monitoring, which can alert you if any collections or other suspicious activity shows up on your reports.

Speaking of unethical actions, you need to consider the possibility that your son could steal your financial identity. He probably has access to the information he would need to open new accounts in your name, including your Social Security numbers. His failure to pay his bills, even though it appears he can, indicates some moral shortcomings. He may not be low enough to rip off his parents, but if you have any suspicions about his trustworthiness, consider putting a credit freeze (also known as a security freeze) on your credit reports. This freeze should prevent anyone from opening credit accounts in your name.

Finally, you can write letters to creditors telling them to stop contacting you. You run the risk that such a letter could lead a creditor to sue your son. But his creditors may sue him anyway if he doesn’t respond to their requests for payment.