Great information from Suze Orman:
How Tax Reform Makes Saving For College Easier
For parents and grandparents who are saving or currently paying for children’s educational expenses (either college or, as of 2002, secondary or primary school educational expenses), there are new and quite beneficial privileges for you in the bill as well. As of 2002, for example, there’s a new $2,000 per-child annual ceiling (up from $500) on contributions to an Education IRA; and for the first time ever, starting in 2002, contributions and earnings can be used to pay for tuition, tutoring, and other expenses for grades K-12 as well as for college expenses. Although the money you contribute to an Education IRA is still not tax deductible, as of 2002 the earnings will be tax free if spent on qualified educational expenses. Furthermore, as of 2002, using money from an Education IRA no longer disqualifies you from taking a Hope Scholarship or Lifetime Learning Credit in the same year (as long as the Education IRA money and the tax credits are not used for the same expenses). Also, starting in 2002, the income cap to qualify for an Education IRA will go up to $110,000 for single filers and to $220,000 for married filers (from $95,000 and $150,000, respectively, in 2001). For these reasons, I have now switched from not liking Education IRAs to liking them very much as an education savings program.
Another example: Starting in 2002, any earnings that accumulate in any Section 529 college-savings plan will be income-tax free when used to pay qualified expenses for a child’s higher education, including payments for tuition, fees, room and board, and books. (If you have a child and don’t know about Section 529 plans, you should. For a description of them, please see the ASK SUZE book on Planning for Your Future, pages 107-111. For the most thorough discussion anywhere of Section 529 plans and the new tax bill’s effect on them, please see Joe Hurley’s Web site, savingforcollege.com.) By the way, given this new tax advantage for Section 529 plans, there is now no reason whatever to save for college via a Uniform Gifts to Minors (UGMA) or a Uniform Transfer to Minors (UTMA) account. In my opinion, these accounts are now obsolete.
A third new benefit: Beginning in 2002, for the first time, up to $3,000 annually (rising to $4,000 annually in 2004) of any money you spend directly on qualified higher education expenses will be deductible from your income on your tax return (if you earn $65,000 or less a year for single filers or $130, 000 or less a year for married filers).
Yet, let me stress once again that these new education and retirement-savings benefits are set to expire in 2011 and may be repealed at any time before them. So please, please, please learn about them now and act on them immediately.