How You Can Use 529-Plan Money

My daughter is leaving for college next week. What expenses can I pay with money from our 529 college-savings account?

You can use funds from a 529 account tax-free for tuition, fees, books, supplies and required equipment. But there are also some lesser-known expenses that you can use the money for, which may help you during this last week before she leaves.

The economic-stimulus plan temporarily expanded the rules to allow tax-free 529 withdrawals for a computer and Internet access in 2009 and 2010 (in the past, those expenses qualified only if the school required them).

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And you can also use the money tax-free for room and board, as long as your daughter is at least a half-time student. The full cost of room and board counts if her housing is owned or operated by the college. Off-campus housing costs can qualify, too, up to the allowance for room and board that the college includes in its cost of attendance for federal financial-aid purposes (your college financial-aid office can give you that figure).

For more information, see the "qualified tuition program" section of IRS Publication 970, Tax Benefits for Education.

While you're deciding how much money to withdraw from the 529 for her college costs this year, keep in mind that the stimulus plan also expands the rules governing tax credits for college costs. The new American Opportunity credit replaces the Hope credit for 2009 and 2010 and increases the amount qualified education expenses for which you can get credit from $1,800 to $2,500. The credit offsets your tax bill dollar for dollar.

You can claim the American Opportunity credit in the first four years of college (not just the first two years, as was the case with the Hope credit). And the income limits to qualify have increased - from $58,000 to $90,000 if you're single and from $116,000 to $180,000 if you're married filing jointly.

You can't double dip on tax benefits, so money you use to pay for college from a 529 or a Coverdell education savings account (both of which can already be used tax-free for college bills) doesn't count toward the American Opportunity credit. The tax credit is based on 100% of eligible college costs up to $2,000, plus 25% of college costs of more than $2,000, which means that you'll need to pay at least $4,000 in college costs for the year from a source other than a 529 or a Coverdell to qualify for the full credit. Tuition and fees count toward the American Opportunity credit; room and board do not (which was also the case for the Hope and Lifetime Learning credits). And course materials, such a textbooks, are now eligible expenses for the American Opportunity credit, too. See www.textbookaid.org, a site that was created by the National Association of College Stores, for more information about how the credit applies to course materials.

For more information to help with college costs, see our Paying for College center at Kiplinger.com.