If you pay college costs for grandkids, you’re not eligible for the most popular credits and deductions. But you may get a break if you save in a 529 plan. By Kimberly Lankford, Contributing Editor July 23, 2013 I’m going to be paying my granddaughter’s medical school tuition. I’ve heard that if I make the payments directly to the school I can get some sort of tax break. Is that true?SEE ALSO: What Grandparents Should Know About Opening 529 Accounts Several income tax breaks are available for college and graduate school tuition, but you can usually take them only for yourself, your spouse or dependents you claim on your tax return (see A Tax Break for Grad School). You’re probably thinking about the special rule that excludes direct payments of tuition (but not room and board) to educational institutions from the $14,000 annual gift-tax limit. This exclusion applies to anyone making the tuition payment, and it’s popular with grandparents who want to get some extra money out of their estate without having to file a gift-tax return. To qualify, you must pay the school directly; you can’t give the money to your granddaughter first. For more information, see Tax-Smart Ways to Help Your Kids (and Grandkids). Two-thirds of the states offer a state income tax break for 529 contributions -- and grandparents who make contributions are eligible. You generally need to contribute to your own state’s 529 plan to get the tax break (although five states -- Arizona, Kansas, Maine, Missouri and Pennsylvania -- allow a deduction for contributions made to any state’s plan). Some states let anyone take a deduction for their contributions; others give the tax break only to the owner of the account. In the latter case, it’s a good idea for parents and grandparents to open separate accounts for the child so that both can deduct their contributions. (There’s no limit on the number of 529 accounts that can be open for one child, and there’s no maximum age to use the money.) Your granddaughter could use the money tax-free for medical school tuition, room and board, and mandatory fees. See Give the Gift of a 529 Plan Contribution for details. For more information about tax breaks for education, see IRS Publication 970, Tax Breaks for Education, and the IRS’s Tax Benefits for Education Information Center for details. Got a question? Ask Kim at askkim@kiplinger.com.