Unless you are the primary means of support for a grandchild, opportunities for tax deductions are very limited for grandparents. The trend in Congress has been to provide tax benefits for saving for education and for the care of minor children through tax credits, rather than through deductions. IRS Publication 970 -- Tax Benefits for Education, contains the details on a number of tax incentives for college savings that may be applicable to grandparents.
Exemptions and Dependency Deductions
You may be able to claim your grandchild as a dependent, if you meet certain qualifications. Specifically, you must provide a majority of the support for the child during the tax year, and the child must not be able to claim himself or herself as a dependent. If your grandchild is a full-time student, you may be able to claim him or her as a dependent until age 24. If your grandchild is permanently and totally disabled, there is no age test. For tax year 2010, you can deduct $3,650 against income for each exemption.
Education
The most significant tax deduction opportunity for grandparents is the Section 529 plan, named for a section in the tax code that allows families to save tax deductible dollars for college. Contributions are tax deductible, earnings grow tax-deferred, and withdrawals for qualified college expenses are tax-free. The law allows you to contribute for grandchildren, grand-nieces, grand-nephews or anyone else you choose. There are no income restrictions on your eligibility to contribute. Each state sponsors its own version of the Section 529 plan. Contribution limits can range up to $200,000 per year and more.
Estate tax considerations
Beginning in tax year 2011, estates over $1 million will be subject to a federal estate tax of up to 55 percent of amounts over that figure. Contributions to section 529 plans out of your name, as well as gifts and transfers to irrevocable trusts naming your grandchildren as beneficiaries will not be subject to the estate tax, however.
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