6 Tax-Smart Ways to Help your Kids (or Grandkids) by Karla Hopkins

Uncle Sam (and some states) will reward you for helping your children or grandchildren. Several tax-smart ways are:

 Contribute to a 529 Plan. Money in a 529 Plan can be used tax-free for college costs. It is good idea for parents and grandparents to open separate accounts for a child. There is no limit on the number of 529 Accounts that can be open for one child.
 Get a gift tax break from 529 contributions. You can generally only gift up to $13,000 per person in 2011 but you can make 5 years' worth of 529 contributions all in one year without triggering the gift tax.
 Get a tax credit for tuition payments. The American Opportunity Credit can cut your tax bill by up to $2,500 per student. There are certain income limitations and other specifics for this credit but it is a dollar-for-dollar reduction in your tax liability.
 Pay tuition directly to a college. Direct payments to educational institutions are excluded from the annual $13,000 gift limit. This rule applies to anyone and is particularly popular with grandparents. Only tuition qualifies, NOT room and board.
 Help your kids or grandkids contribute to a ROTH IRA. As long as they have earned income, they qualify for a ROTH. Since most kids don’t want to stash away all their paychecks for the future, you can give them the money for their contributions. While there is no tax break to you, the kids will reap the benefit in the future.
 Open a custodial account for a child. This is not a big tax break strategy but is a great tool for teaching kids about money and savings. The child will take over the account when they turn 18 but until them, you can manage it together.

With all of these areas, it is important to consider the impact any or all of these have on various forms of financial aid and your ability to pay for college. Contact your tax and financial advisors to coordinate an effective savings plan.