Jun 29, 2026
As college costs increase, students have been forced to take on a growing amount of debt. In fact, 47% of student borrowers with a bachelor’s degree owe more than $25,000 — and the average student loan balance among households with student debt is $52,138.
Getting family help covering the cost of a degree can reduce or even eliminate borrowing. But there are some things to think about, including how a financial gift can impact tax bills.
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Say, for example, that Ellen has $50,000 in appreciated stock that she paid $25,000 for years ago. She wants to give the money to her grandson to help pay for college, but she’s worried that her gift could end up sticking him with a big tax bill, as she has $25,000 in unrealized gains.
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What are Ellen’s options in this situation to help her grandson without the IRS taking a big cut?
Grandma could sell the stock and pay the tuition directly
One of the easiest ways for Ellen to help her grandson avoid a tax bill would be to just sell the stock herself.
“If the genuine goal is to help a grandchild pay for college and not burden them with the tax bill, the cleanest solution is to gross up the proceeds so they can cover the expected tax on the sale,” Brando Reyna, CFA and founder of Reyna Capital Advisors, told Moneywise.
If Ellen takes this approach, the taxes may not be as big of an issue as she thinks. “Long-term capital gains tax starts at a year and a day. Less than that, the grandmother will pay ordinary income tax,” explained Aaron Ulrich, owner of Integra Financial Planning, LLC to Moneywise.
Ellen has owned the stock for a long time and capital gains are taxed at a lower rate than ordinary income, although, as Ulrich explained, they’re progressive based on income. “Her income and tax filing status are important variables,” he says.
Ellen is single, and in 2026, single tax filers with taxable income up to $49,450 pay a capital gains tax rate of 0%, while a 15% rate applies to single filers with $49,451 to $545,500 in taxable income. The capital gains rate hits 20% for income above that level.
“A simple way to reduce tax exposure is to break up the sale of the stock over two calendar years,” advised Ulrich. “Because long-term capital gains are tied to income levels, selling half now and half next year could potentially bring the level of gain to a lower exposure.” However, Ulrich acknowledged that waiting carries risk if the stock goes down.
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Ellen could just opt to sell today, because, as Reyna pointed out, the cost would still be very low. Even if 15% was charged on the full $25,000 in profit, the federal tax bill would be just $3,750. And once she sells, if she pays his tuition directly, this isn’t considered a taxable gift, so there are no further obligations to the IRS.
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Grandma could transfer the stock shares to her grandson
Ellen also has another option: Transferring the stock.
“The grandmother should transfer the shares into a custodial UTMA account in the grandson’s name,” John Gillet, CEO and founder of Gillet Agency in Hollywood, FL told Moneywise. “When the grandson sells the shares to pay for college, the capital gains are taxed at his capital gains tax rate. At that point, the grandson will be a college student with likely little to no income, so his capital gains tax rate at that time could be 0%.”
The risk of this approach is that the kiddie tax might apply if her grandson is under 18, if his earned income doesn’t exceed 50% of his financial support, or if he’s a full-time student between ages 19 and 23. This means a good portion of the gains would be taxed at his parents’ capital gains tax rate.
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In this case, it would be important to figure out whether Ellen or her grandson’s parents have a lower capital gains tax rate.
It’s also worth noting that the gift could affect her grandson’s eligibility for financial aid if it’s given to him directly.
Schools consider up to 20% of assets owned by a dependent student as being available for school and could count income from the sale of assets when awarding aid. Direct tuition payments by grandparents and other third-party cash support are no longer reported as student income for the FAFSA, thanks to the FAFSA Simplification Act, but some schools still treat tuition payments as cash support that could affect need-based aid. The policies vary by college, so a phone call to the financial aid administrator could be helpful.
There may also be a way around these consequences. “A more unique proposition would be to pair the gift with two stocks, one that has an embedded gain and one that has an embedded loss to offset each other. In this situation, you could neutralize the tax liability altogether,” advised Reyna.
Ellen should explore each of these options, consider the capital gains tax rates that could apply, look into financial aid rules and make the choice that’s best for her grandson. Fortunately, she clearly has options. It’s just a matter of finding the right one.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
