How to Avoid Gift Tax Excess Contributions in a 529 Plan

Plan to file a gift tax return if you make a large contribution up front.

529 college savings plans allow for significant up-front contributions, in contrast to other types of college savings plans. You can contribute up to five times the allowable gift exclusion amount ($13,000 as of 2010) in a single year without incurring gift taxes, as long as you fulfill a couple of requirements. First, you have to report a pro-rated portion of your contribution each year for up to 5 years. Second, you can't make any additional gifts until the pro-rated period is completed.

Otherwise, the IRS will consider any amount beyond the allowable gift exclusion amount taxable in the year it is given.

Things You'll Need

• IRS Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return
• IRS Form 709 Instructions

Instructions

1. Consult the IRS.gov site for the current annual gift exclusion amount. For 2010, this amount was $13,000 per spouse, according to the IRS website.

2. Determine how much you and your spouse, if applicable, plan to contribute in 1 year. You can contribute up to $65,000 each as of 2010 without having to pay any gift taxes.

3. Complete and file IRS Form 709 along with your regular tax return by the reporting deadline, showing the percentage of your contribution you wish to allocate for the current year. If you gave the maximum allowable, you should report only 20 percent of the total gift.

4. Have your spouse complete a separate IRS Form 709 if the contribution you made to the 529 plan was intended to take advantage of the gift tax exclusion for both of you.

5. 

   Plan to report the appropriate percentage of your gift each year on your tax return.

   Plan to complete IRS Form 709 each year that you need to pro-rate your total gift. For example, if you and your spouse each contributed $26,000 in 2010, you would each report 50 percent of the gift in the first year and 50 percent of the gift in the second year.

Tips & Warnings

• You don't have to file a return if you give an amount equal to or less than the annual exclusion each year.

• Gift tax returns are complex. It is a good idea to consult with a tax professional for your particular situation, if possible.

References

• SEC: An Introduction to 529 Plans
• IRS: Frequently Asked Questions on Gift Taxes
• IRS Form 709, Gift Tax Return
• IRS Form 709 Instructions
• Investopedia: 529 Plans - Contributions

Resources

• Investopedia: 529 Plans (Overview)