Q: My wife and I don't make a whole lot of money, but we make enough that our only son won't qualify for financial aid when he goes out of state to college in the fall.

We had saved money in a custodial account for his college education. When we read that the kiddie tax law had changed, we took a slight tax hit and moved the custodial account to a 529 plan.

Now I've been told that our strategy -- to give appreciated stock to him after he turns 18 and is no longer a minor and able to open his own brokerage account -- won't work either. Is this true?

My mother is in a very low tax bracket, so could I bring her into the college planning circle?

A: Sad to say, but your strategy won't work. Student loans are more difficult to obtain, many middle-class families won't qualify for aid and now any tax break available by saving in a custodial account or giving away appreciated stock has been taken away.

Before the new kiddie tax law, unearned income (total income minus earned income equals unearned or investment income) of children younger than 14 was taxed at the parent's rate; unearned income of children 14 and older was taxed at the typically lower children's tax rate.

The new kiddie tax rules apply in tax year 2006 and beyond for any child 18 and younger on January 1, 2007. Unearned income of more than $1,800 of children 18 and younger will be taxed at the parent's rate. A child's investment income will first be reduced by a $900 standard deduction; the next $900 will be taxed at the child's rate and the remainder at the parent's rate.

Effective Jan. 1, 2008, this is expanded to include "children" younger than 24 if they are full-time students.

Now students younger than 24 who have saved and invested on their own are going to pay a higher tax on unearned income over $1,800, unless they have provided more than half of their annual support from earned income (salary and wages).

A gift valued at as much as $12,000 given to anyone within a calendar year does not require paying gift taxes or the filing of a gift tax return. Cash is a common form of a gift but appreciated stock with a fair market value of $12,000 or less makes an ideal gift for someone in a lower tax bracket than you.

You and your wife could each give $12,000 of appreciated stock to your mother. Your mother would have the same cost basis in the stock as you have. Under current tax law, if she is in the 15 percent or lower tax bracket, she will pay no capital gains tax if she sells the stock this year through 2010. A single tax filer with ordinary taxable income of $32,500 or less and married filing joint tax filers with ordinary taxable income of $65,100 or less will qualify for the zero capital gains tax. Taxes on capital gains will not be owed up to the point where the gains push the income to the previously mentioned limits. Any gains beyond the limits will be taxed at the 15 percent capital gains rate.

Your mother is free to give to whomever she would like, including her grandson. She could give $12,000 in cash directly to your son without paying gift taxes or filing a gift tax return. In addition to this gift, she could make a direct payment to the educational institution for your son's tuition (not books, supplies or room and board). This is deemed a qualified transfer and not a gift to the ultimate beneficiary. This payment must be made directly to the school and not to your son.

Happy empty-nesting!