Ask Liz Weston

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gift 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: “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: An aunt left him out of her will. Can his siblings share the windfall?

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Dear Liz: My brother and I have received a cash inheritance from our aunt, as have our cousins, among a few others. Our youngest brother was excluded, as was our cousins’ youngest sibling. I believe my aunt, who was 96 when she died and in her 80s when her will was done, simply forgot these two as the family was spread out and contact was infrequent. My brother and I want to do the right thing for our younger brother and give him an equal share from our inheritance. I know most states don’t have inheritance taxes, but since he won’t technically be inheriting it I wonder if there are any other tax implications for us or him.

Answer: Whenever gift taxes are owed, which is rarely, they’re paid by the giver.

Dividing your inheritance with your brother would be a gift to him, so he would owe no taxes. You might have to file a gift tax return if the amount you give him is more than $19,000 (the current annual gift tax exclusion amount). But you wouldn’t owe gift taxes until the amount you give away over that annual limit exceeds your lifetime limit, which in 2025 is $13.99 million. The same is true for your other brother — a gift in excess of the $19,000-per-recipient annual exclusion would require filing a tax return, but probably not paying taxes.

Gifts in excess of the annual exclusion also reduce the amount you can pass free of estate taxes after your own death. If you’re a multimillionaire and likely to face these taxes, please consult an estate tax attorney.

Q&A: When giving cash gifts, does anyone need to pay taxes?

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Dear Liz: I am a widow age 95. I would like to give my three kids, who are in their 60s, $5,000 each this year. What are the taxes, and who pays them?

Answer: Gifts aren’t taxable to the recipients, and the only givers who have to pay taxes are those who have given away millions of dollars during their lifetimes.

Let’s start with the basics. You only have to file a gift tax return, which notifies the IRS of your generosity, when you give someone more than the annual exemption limit, which is $18,000 in 2024. So you could give your kids $54,000 before the end of the year and not have to tell the IRS.

You wouldn’t actually owe taxes on your gifts until the amounts you give away above that annual limit exceed your lifetime gift and estate limit, which is currently $13.61 million.

A taxable gift is typically deducted from the amount that avoids estate taxes at your death. But if you have enough money to worry about that, you should have an estate planning attorney who can advise you about how to proceed.

Who owes taxes after death?

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Dear Liz: My brother passed away, and for one of his bank accounts, he had named me as his beneficiary. Do I have to pay taxes on the $100,000 I received? Is it subject to a gift tax?

Answer: Estate taxes are paid by estates, not by inheritors, said estate attorney Burton A. Mitchell of Los Angeles firm Jeffer Mangels Butler & Mitchell. The vast majority of estates don’t owe taxes anyway, now that the estate tax exemption limit is over $5 million.

Some states have estate taxes with lower exemption limits, and a few have what are called “inheritance” taxes, which are levied based on the relationship of the heir to the deceased, Mitchell said. The more distant the relation, the higher the tax rate. Siblings typically face a higher rate than spouses or children. Ask the executor of your brother’s estate whether any of these taxes apply.

Gift taxes, meanwhile, are the responsibility of the giver and again aren’t an issue for the vast majority of people. Your brother would have had to give away more than $5 million in his lifetime for federal gift taxes to be an issue.

Your inheritance may, however, be subject to creditors’ claims if your brother didn’t leave enough money to satisfy his debts, Mitchell said. Check with the executor of his estate and consult an attorney if necessary.

Tax breaks for helping grandchildren

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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.