It is considered a gift. It is not charity or salary. If you give them more than $12,000 it is considered income for them.

Unless it is set up as a specified college fund like a section 529 plan or something like that no, but your grandchildren do have to recognize that money as a gift technically, so make sure they do that :-) If you want to deduct, they have to include. Dont you just love accountants :-)

First, let's clear the air about gifts: Generally (and specifically in your case), gifts given are not taxable to the recipient. The only way they become taxable to the recipient is if they can be reasonably construed as compensation for a past or future service, or an expectation to deliver services. So any gift you make to a grandchild's college fund is not taxable to your grandchild. If your gift is under $12,000 in 2007, it is not taxable for federal gift tax purposes as you are allowed a $12,000 exclusion for gifts to any one person. However, note that if the gift is up to $60,000, then you can elect to treat the gift as being made over a five-year period, so it will not be taxable for each year of the five year period ($12k a year x 5 years). Next, let's establish that there are currently no federal tax benefits for contributing to a college fund for a child/grandchild. The only benefits you can receive, if any, are at the state level. The type of fund you contributed to is significant. If it is a "section 529" plan, you may be able to deduct the amount of your contribution in your state; some states provide a valuable tax credit instead of a deduction. However, typically you have to contribute to a qualifying in-state plan to qualify for the benefits. Only three states permit residents to deduct contributions made to another state's 529 plan. The following websites have more information on this that will direct you to your specific state's treatment of contributions to 529 plans: http://www.finaid.org/savings/state529deductions.phtml http://www.savingforcollege.com/compare_529_plans/?plan_question_ids%5B%5D=437&page=compare_plan_questions

Not federally but some states allow you to. So it depends on what state you live in and where the fund is from and what kind of fund it is (529 or Coverdell).