A Qualified Tuition Plan can be used to shift income to your child or grandchild. The income generated from assets gifted to a Qualified Tuition Plan grows tax-deferred. When the child receives distributions from the Qualified Tuition Plan for college, the accumulated income is taxed to him.
The parents shifted $5,000 of income to their child by using a Qualified Tuition Plan can be used to shift income to their child. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%). Since the childs taxable income was taxed at the 0% tax bracket, there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,500.
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by using a Qualified Tuition Plan can be used to shift income to your child.