|How does the annual gift tax exclusion apply to contributions to a 529 plan?|
All contributions to 529 plans are considered present interest gifts and qualify for the annual federal gift tax exclusion. This means that you can contribute up to $15,000 per year, per beneficiary without incurring federal gift tax. So, if you contribute $20,000 to your son's 529 plan in a given year, for example, you'd ordinarily apply this gift against your $15,000 annual gift tax exclusion. The remaining $5,000 would be a taxable gift and you'd report it on a federal gift tax return.
However, under special rules unique to 529 plans, you can gift a lump sum in a given year — up to $75,000 for individual gifts and $150,000 for joint gifts — and avoid federal gift tax by making a special election to treat the gift as if it were made evenly over a five-year period. You make this election on your federal gift tax return (which you must file if your gift is over $15,000). For example, if you make a $75,000 contribution and make the election, your contribution will be treated as if you'd made a $15,000 gift for each of five years.
Lump sum gifts generally will not be considered part of your federal estate. But there is an exception. If you make a lump sum gift, elect to spread the gift over five years, and then die before the five-year period has ended, the portion of your contribution allocated to the years after your death will be included in your estate. For example, let's say you make a $50,000 contribution to a 529 plan in Year 1 and elect to spread the gift over five years. You die in Year 2. The result is that your Year 1 and Year 2 contributions of $10,000 each ($50,000 divided by 5 years) are not part of your estate, but the remaining $30,000 would be included in your estate.
Although your gifts over $15,000 in a year are taxable gifts, you may not actually write a check for the tax. Remember that you must use up your lifetime applicable exclusion amount before you'd be liable for an out-of-pocket payment for the gift tax.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.