Ask Liz Weston

Get smart with your money

Taxes

Q&A: Grandparent’s generosity could affect financial aid

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Dear Liz: You wrote in a recent column that grandparents could pay tuition directly to a school, and it would not trigger a gift tax return. That’s true, but my daughters have told me — and two private, expensive, and not excessively generous universities have verified — that my paying $20,000 in tuition would decrease my grandchildren’s financial aid package by $10,000 to $20,000. I would appreciate your comments.

Answer: How about, “No good deed goes unpunished — at least at private, expensive and not excessively generous universities?”

The vast majority of colleges use the Free Application for Federal Student Aid or FAFSA to determine financial need. The FAFSA was revised a few years ago so that it no longer counts cash gifts from grandparents or other non-custodial relatives. The same is true for withdrawals from 529 college savings plans owned by non-custodial relatives. Before the change, such gifts and withdrawals would be counted as untaxed student income, which had a huge negative effect on financial aid. Now, the money has no impact at all — except at schools that haven’t adopted these changes.

About 200 private colleges and universities use an additional tool, the College Scholarship Service (CSS) Profile, which can still factor in help from grandparents and other relatives. Typically, though, the maximum reduction would be 50%, not dollar for dollar.

Q&A: How are you taxed if you work abroad?

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Dear Liz: It has become difficult to find good employment in my field. I’ve been able to find several openings that sound exactly like what I want outside the U.S. If I successfully apply for a position in a foreign country, it could mean paying income taxes into both the U.S. system and the foreign country. Not being a citizen of that country may also limit possible future employment opportunities. Once employed and resident in that county for the required time, I could apply for citizenship and pay the fee to renounce U.S. citizenship.

Obviously, this step would come with significant financial implications, including no longer being able to receive Social Security (into which I have paid during my U.S. employment). My banking and investment accounts would have to be completely rearranged as well. Obviously, a large number of people emigrate and change their citizenship every year, but how does one navigate all this financially?

Answer: You’ve come to some interesting but likely erroneous conclusions about working abroad.

Let’s start with taxes. The U.S. tax code has a few provisions designed to help people working abroad avoid double taxation, including the foreign earned income exclusion (which is up to $132,900 in 2026) and the foreign tax credit. You will still be required to file annual tax returns with the IRS reporting your worldwide income, but much if not all of your earnings abroad could avoid U.S. taxes.

Next, let’s discuss citizenship. About half the countries in the world, including the U.S., allow dual citizenship. If the country where you want to work does not, and you decide to renounce your U.S. citizenship, you still have a right to the Social Security benefits you’ve earned in America.

Keep in mind, though, that renunciation is considered permanent. If you changed your mind later, you would have to try to get a U.S. visa and go through all the steps to be naturalized, which can be a long process.

As far as your financial accounts, they can stay as they are as long as you maintain U.S. citizenship. You’ll likely need to set up bank and perhaps other financial accounts in the new country as well. Consider reading “Borderless Living: How to Create Freedom and Financial Security for Americans Abroad” by financial planner Brian Dunhill.

Q&A: Free service can help taxpayers file overdue returns

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Dear Liz: I am 85, and my husband is 87. We are both retired. He has not paid our income tax for three to five years. I have given up trying to get him to do it. I know it’s partly my fault, as I should have taken more responsibility. What should I do? Whom should I call?

Answer: Presumably, when you write that your husband has failed to pay your taxes, you also mean he’s failed to file your returns. Failing to file actually incurs much larger penalties than failing to pay, but either way, your tax debt is likely to have grown over the years due to inaction.

Some good news: AARP Foundation Tax-Aide offers free help with tax returns, including catching up on prior year filings. Tax-Aide is designed to benefit low-to-moderate income people, particularly those 50 and older, but anyone can use its service unless their returns are particularly complex. You can find the various preparation options in your area using the locator tool at https://www.aarp.org/money/taxes/aarp-taxaide/locations/.

Another option is to ask friends and family for a referral to tax professionals they trust. You can use the IRS Directory of Federal Tax Return Preparers to verify credentials.

Recognizing and coping with cognitive changes can be terribly difficult. Your husband may have been too proud to say that he’s no longer capable of this chore. But as you noted, taxes are typically a joint responsibility and now it’s your turn to step up and get the help you both need.

Q&A: Tuition payments could require filing gift tax return

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Dear Liz: I have been paying college tuition for my grandson: $20,000 per semester for the last three years. He has used the university’s online option to pay the tuition by transferring the money from my bank checking account. Am I entitled to a tax exemption? How should I claim it when I return my tax return?

Answer: There’s no tax exemption or other direct tax break for paying someone’s tuition. If the money went directly from your account to the school, however, you don’t need to file gift tax returns to report your generosity. The tuition gift tax exclusion allows you to pay an unlimited amount of tuition as long as it’s paid directly to a qualified educational institution. A similar exclusion exists for paying medical bills for someone else, as long as the payments go directly to the medical providers.

If the money went from your account to his and then to the school, however, you would be required to report the amounts you gave above each year’s annual gift tax exclusion amount using IRS Form 709. (The exclusion amount was $17,000 in 2023, $18,000 in $2024 and $19,000 in 2025 and 2026.) If that’s the case, contact a tax pro for help in catching up on this paperwork. You won’t owe gift taxes until the amount you give away above those annual limits exceeds your lifetime gift and estate tax exemption amount, which is $15 million in 2026.

Q&A: “Superfunding” a 529 account requires filing gift tax returns

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Dear Liz: You wrote that people could contribute up to five times the annual gift tax exclusion to a 529 college savings plan without having to file a gift tax return. People can contribute that much without the gift reducing their lifetime gift and estate tax exemption amounts, but they must file annual gift tax returns to report the gift.

Answer: To recap, few people will ever have to pay gift taxes, but gifts over the annual exclusion amount (which is $19,000 in 2026) usually require filing a gift tax return. Gift taxes aren’t owed until the amounts in excess of the annual exclusion total more than the giver’s lifetime gift and estate tax exemption amount (which in 2026 is $15 million).

Generous givers can “superfund” a 529 college savings plan by contributing up to five years’ worth of annual exemption amounts at once. In 2026, that would be $95,000. To keep the gift from counting against your lifetime limit, however, you must file gift tax returns annually to indicate the gift is to be spread over multiple years.

It’s also important to know that any other gifts you make to the same beneficiary during the five-year period will reduce the allowance for 529 gifting. And if the giver dies during the five-year period, some of the gift will be added back into their estate.

There are other rules that apply to superfunding a 529, so anyone considering this option should discuss their situation with a tax pro and likely will want to consult an estate planning attorney as well.

Q&A: How to fix a mistaken contribution to an IRA

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Dear Liz: When I retired, I had a small 401(k) with about $12,000 in it. Instead of rolling that money into an IRA, I took a distribution and paid taxes on it. I had no immediate need for the remaining funds, so eventually I opened a new IRA account and deposited the money.

I now realize I should have put it in a Roth IRA so I wouldn’t face double taxation on the money. This is the stupidest thing I’ve done in recent memory. Is there any legal mechanism I can use to get that money out and into a Roth without paying taxes the second time?

Answer: You made a mistake, but probably not the one you think.

You can’t contribute to an IRA — or a Roth IRA, for that matter — if you don’t have earned income. So if you’ve fully retired, you should contact your IRA administrator and let them know you need to withdraw your “excess contribution” as well as any earnings the contribution has made.

If you contributed this year, you have until your tax filing deadline — typically April 15, 2026 — to remove the funds without penalty. If you contributed in a previous year, you’ll typically face a 6% excise tax for each year the money remained in your account.

Now, a warning about financial mistakes: They tend to become more common as we age. That can be incredibly unsettling, especially to do-it-yourselfers used to handling finances competently on their own. Retirement is a good time to start implementing some guardrails to protect ourselves and our money.

Hiring a tax pro would be a good first step. Anything to do with a retirement fund should be run past this pro first to make sure you’re following the tax rules.