Tax Deductible Ways to Give to Your Grandchildren

As of 2012, the Internal Revenue Service imposes a gift tax on monetary and non-monetary gifts in excess of $13,000 to any one recipient. Each spouse is permitted to make a gift of up to $13,000 to each recipient without having to report the gift or pay taxes on it.

Many grandparents feel that the best investment that they can make in their grandchildren's lives is to contribute to their higher education. Costs that you pay for a grandchild's education may be tax-deductible. If you pay tuition or other related educational expenses and you can claim your grandchild as a dependent, you can request a tuition and fees deduction. Tuition must be paid directly to the school. You may also choose to invest in a college savings plan, such as a 529 Plan. This type of savings plan allows you to save money for a relative in your name for future educational expenses. Although the contributions are not tax-deductible, there are other tax advantages: The contributions decrease your taxable estate and you can avoid capital gains taxes that you may otherwise incur if you invest the funds in a different manner.

A Coverdell Education Savings Account is similar to a 529 Plan, but it may be used for educational expenses that children incur during primary or secondary school as well as college. The account grows tax-free and can offset expenses for private school, a computer and other educational supplies. According to current IRS guidelines, a maximum of $2,000 can be contributed to each grandchild's account each year. As of 2012, the maximum income that a couple can have and still contribute to this plan is $220,000. A single person's income may not exceed $110,000.

Grandchildren may incur significant medical expenses if they are disabled, have a severe medical condition or suffer a significant injury. You can deduct the amount that you pay for medical expenses, including insurance premiums. The amount must be sent directly to the healthcare provider rather than to the grandchild. This amount will not count toward the $13,000 gift.