by SavvyWomenWin

Created on: November 28, 2009   Last Updated: November 29, 2009

In an economy where the majority seems to be scrimping and saving, what about those lucky few who are in a position to help those in their families? Some people call them Grandma and Grandpa. According to a recent report from the College Savings Foundation, 65% of grandparents plan to help their grand kids pay for college. While that may cause a sigh of relief from some over burdened parents struggling in this current economy, proper planning is in order to make sure the child's chances for financial aid are not hurt.

So what should Grandma do to help with ever rising tuition costs? Each year anyone is allowed to give away up to a certain amount per person, tax-free. Called the annual gift tax exclusion, the IRS allowance for 2009 is $13,000 per person, and indexes annually to inflation per an IRS schedule. However, anyone can pay any amount of school tuition directly to the institution, and it is not a part of this exclusion. (Medical expenses are treated the same way.) So if Grandma is paying for all of the tuition - she should cut a check directly to the school and she could pay as much over $13,000 tuition as she wants. She would still have the full exclusion credit left to give money to Johnny directly for his apartment or new computer.

But what if Johnny needs to apply for financial aid, and Grandma wants to gift up to $13,000 to him to help, but that does not cover all the tuition? When then what Grandma should NOT do is cut a check directly to Johnny. That money would be taxed as Johnny's income, and if he is being claimed on his parent's taxes that money would be seen as his and taxed unfavorably at a higher rate. Adding insult to injury, when he then applies for Federal financial aid, this income would have to be reported on the Application for Federal Student Aid form. This could reduce his aid award by up to 50%. In this case, Grandma should not even pay the school directly, as that could reduce his available Federal award as well. The best thing for her to do if she is going to contribute under $13,000 is to make the gift directly to his parents. Johnny's parents would be entitled to several tax exclusions if they are still claiming Johnny on their taxes, and this would open up the availability for the most financial aid.

Another thing grandparents can do (or aunts or uncles for that matter) is open a 529 account for Johnny. This is an account that is assigned to one person to be used for higher education. Once funded, all distributions come out

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