529 and gift taxes

Forum|Forum|4 years ago
December 10, 2021
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Given our daughter graduated college with excess 529 funds, my husband & I closed and transferred the remaining $25,000 from her 529 to our younger son's 529 account in 2021. Is that $25,000 now considered a gift (for gift tax purposes) to our son for 2021? He is in college now, and in 2021, we contributed $4000 to his 529 and pulled about $10,000 of 529 funds to pay for room and board as allowed. Do we need to file a gift tax return citing a gift of $39,000 (25,000+4,000+10,000)? (assuming the transfer is a gift, along with our annual contribution, and room & board) or would our gift be $29,000 because while paying room and board is considered a gift, those 529 funds used to pay room and board had already been counted earlier as a gift to him when first transferred into the 529?

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Best answer by Hal_Al

Q. Is that $25,000 now considered a gift (for gift tax purposes) to our son for 2021?

A. No. "If the new beneficiary is a member of the family, in the same generation or older, there is no penalty. If the new beneficiary is part of a later, or younger, generation, the change may be treated as a gift for tax purposes."

Reference: https://www.putnamwealthmanagement.com/a-529-college-savings-plan-can-be-flexible-as-situations-change

Q. Do we need to file a gift tax return citing a gift of $39,000 (25,000+4,000+10,000)?

A. No. In addition to the beneficiary change exception for the $25K, the 529 Plan exception applies to the $4000. The $10,000 is not relevant to the gift tax question (withdrawing from a 529 is not a gift). Even if you had paid room and board, from your own funds, it would not be a gift (the education exception).