naijaboy17
New member
I am an American living overseas (in Germany) and my children are now preparing to enter university. They will be going to universities outside of USA and are not on the FAFSA list of qualifying schools. This means their expenses are not eligible for 529 plans. I am trying to find the best way to use these funds with the least tax impact. These are the options I’ve thought of so far:
1) Send the money to myself and give it to the kids. This will show up as US sourced taxable income for me. IRS will want me to pay income tax and 10% penalty. I am in one of the higher tax brackets (e.g. 32%) and while I take the foreign tax credit to zero out my US tax liabilities, a) I think this would be counted as passive income and is US sourced so I cannot use my foreign tax carryover, and b) I assume this money would be taxed at the highest percentage. 32% + 10% penalty for ineligible 529 withdrawal will mean 42% tax on the earnings & interest in the 529. Ouch.
2) Send the money to my kids directly. They would be in a low tax bracket - e.g. 10% and would have to pay 10% income tax + 10% penalty tax, so 20% together, half of what I would have to pay
On top of all of this, Germany would also want to tax the interest, at 25%. I’m not even sure how to prevent being double taxed on this if it comes to one of us German residents directly. So to avoid German taxation, the other two ideas are:
3) Change the beneficiary of the plans to a family member (e.g. cousin) who will be going to college, in exchange for them / parents sending me an equivalent amount of money directly. I think this would be tax free in this case.? Although I would probably need to give them something to make it worth their while - e.g. $1000 ..
4) Give the account to my parents and let them withdraw the money to themselves, and pay the university. They are in a lower tax bracket than me and so while there still might be 30% tax, it would be less than if I did it, and I would avoid having to include this on my German tax return.
The 529 plan company itself has said they will not give me any advice on this situation unfortunately, and I so far have not found other consultants knowledgable on these types of cross border issues.
Can you think of better ideas?
1) Send the money to myself and give it to the kids. This will show up as US sourced taxable income for me. IRS will want me to pay income tax and 10% penalty. I am in one of the higher tax brackets (e.g. 32%) and while I take the foreign tax credit to zero out my US tax liabilities, a) I think this would be counted as passive income and is US sourced so I cannot use my foreign tax carryover, and b) I assume this money would be taxed at the highest percentage. 32% + 10% penalty for ineligible 529 withdrawal will mean 42% tax on the earnings & interest in the 529. Ouch.
2) Send the money to my kids directly. They would be in a low tax bracket - e.g. 10% and would have to pay 10% income tax + 10% penalty tax, so 20% together, half of what I would have to pay
On top of all of this, Germany would also want to tax the interest, at 25%. I’m not even sure how to prevent being double taxed on this if it comes to one of us German residents directly. So to avoid German taxation, the other two ideas are:
3) Change the beneficiary of the plans to a family member (e.g. cousin) who will be going to college, in exchange for them / parents sending me an equivalent amount of money directly. I think this would be tax free in this case.? Although I would probably need to give them something to make it worth their while - e.g. $1000 ..
4) Give the account to my parents and let them withdraw the money to themselves, and pay the university. They are in a lower tax bracket than me and so while there still might be 30% tax, it would be less than if I did it, and I would avoid having to include this on my German tax return.
The 529 plan company itself has said they will not give me any advice on this situation unfortunately, and I so far have not found other consultants knowledgable on these types of cross border issues.
Can you think of better ideas?