Do I have to pay for college if my child attends a military academy?
Each of the four branches of the nation’s military operates their own service academies. They are all four-year schools, and students become commissioned officers immediately upon graduation. Competition to get into these schools is fierce. Those who are accepted get full scholarships and a small monthly stipend. For more information, contact: The U.S. Military Academy at West Point, N.Y. (800-822-8762), The Naval Academy in Maryland (800-638-9156), The Air Force Academy in Colorado (800-443-9266), or The Coast Guard Academy in Connecticut (800-883-872).

Are community colleges a good bet if I don’t have the money for a four-year college?
If you don’t have the money to go to a four-year school and you can’t get any financial aid, consider a two-year community college instead. In fact, many educational experts are now urging high-school graduates to go to community college before enrolling in a four-year college or university. Since so many four-year schools are overcrowded, many of their freshman and even sophomores spend most of their first two years taking general education courses that they could just as easily take at a junior college -- at a far lower cost. Going to a community college also gives you a chance to see if college life is for you. Entrance requirements usually aren’t as strict as they are for four-year schools and community colleges often offer more night programs -- an important benefit if you must work to support yourself during the day. And if you decide to apply for a four-year school after finishing junior college, you can transfer the credits you have received and apply them toward your four-year degree in order to graduate sooner.

How do I use money saved in my Coverdell IRA account to pay for college?
Certain expenses for education qualify as tax- and penalty-free distributions from a Coverdell IRA. Qualified expenses include college tuition, fees, books, supplies, and room and board. Contributions to an Coverdell IRA are not tax-deductible, but the principal and interest grow tax-free. Annual contributions to an Education IRA are currently limited to $2,000.

How do I use money saved in my Roth IRA to pay for college?
Certain expenses for education qualify as penalty-free distributions from a Roth IRA. This is important since the penalty for early distribution of a Roth IRA is 10 percent. Qualified expenses include college tuition, fees, books, supplies, and room and board. However, that portion of the distribution consisting of earnings on prior contributions will be taxable since distributions from a Roth IRA to pay for higher education expenses do not qualify as totally tax free unless the account is more than five years old and the owner has attained age 59 1/2. Contributions to a Roth IRA are not tax deductible, but the principal and interest grow tax-free. Annual contributions to a Roth IRA are currently limited to $3,000.

Can I take the student loan interest deduction for a loan I’ve had longer than five years?
For tax years before 2002, you can only deduct student loan interest for the first 60 months of the loan repayment. However, for 2002 and later this rule is eliminated and you can deduct student loan interest as long as you have the loan.

Can I deduct higher education expenses from my income even if I don’t itemize deductions?
In 2002, you may be able to deduct up to $3,000 of college tuition and related fees from your taxable income. The deduction is taken before your adjusted gross income, which means that you can take the deduction even if you don’t itemize your deductions. By lowering your adjusted gross income, the deduction may also help you qualify for other deductions and credits. You cannot take this deduction if you take take a Hope credit or lifetime learning credit for the same student this tax year. The education expense deduction is available to single filers with a modified adjusted gross income of up to $65,000 ($130,000 if married filing jointly).

Can I exclude amounts my employer pays to assist with my graduate and undergraduate studies?
For 2002 and beyond, you can exclude up to $5,250 in employer-provided education assistance for graduate as well as undergraduate studies.

What’s the maximum amount of student loan interest I can deduct in 2002?
You can deduct up to $2,500 of student loan interest in 2002. The maximum amount of student loan interest you can deduct is phased out between modified adjusted gross income levels of $50,000 to $65,000 ($100,000 to $130,000 if filing jointly).

Do college students have to file an income tax return?
Some students have to file an income tax return, while others do not. Much depends on whether they are claimed as a dependent on their parents’ income tax return and whether the student earns any money. If you are a dependent on your parents’ return, you must file a return if any of the following apply:

• Your unearned income, such as interest and dividends, exceeds $750.
• Your earned income, such as wages, exceeds $4,700.
• Your gross income was more than the larger of $750 or your earned income (up to $4,450) plus $150.

Do college students have to pay income tax on their summer jobs?
Most students won’t owe any income taxes and, in many cases, can avoid having any withheld by an employer. Students can skip income tax withholdings if they meet both of the following criteria: 1) they did not owe any tax the previous year; 2) they do not expect to owe any this year. Qualifying students can write the word "exempt" on the W-4 Form.

What is the Lifetime Learning tax credit?
The Taxpayer Relief Act of 1997 established a nonrefundable Lifetime Learning Credit against federal income taxes equal to 20% of up to $5,000 in college tuition and fees per year. The expenses may be incurred during a year by a taxpayer, spouse or taxpayer’s dependent. For 2002, the credit is phased out for single taxpayers with modified adjusted gross income between $41,000 and $51,000. The credit is phased out for joint filers with modified AGI between $82,000 and $102,000. In 2003, the single taxpayer phaseouts are unchanged; the phaseouts for joint filers, however, rise to $83,000 and $103,000. These are the same phase-out ranges for the Hope credit. For expenses paid after June 30, 1998 but before Jan. 1, 2003, up to $5,000 of qualified tuition and fees per taxpayer return are eligible. This means that the maximum tax credit per return is $1,000 ($5,000 x .20 = $1,000). The maximum credit for expenses paid after Dec. 31, 2002 will rise to $2,000. You can’t take the Lifetime Learning Credit for a student in the same year that you either take the Hope scholarship credit or withdraw funds from an Education IRA. For more information see IRS Publication 970, Tax Benefits for Higher Education. You can download it from the IRS Web site or order it by calling 1-800-TAX-FORM (829-3676).

What is the Hope credit?
The Taxpayer Relief Act of 1997 established the Hope credit, for tuition and related expenses incurred in the first two years of college. Eligible taxpayers can claim a tax credit of as much as $1,500 per student for post-secondary tuition and related expenses (such as lecture fees and the cost of books). The credit can only be claimed for two taxable years, even if the student needs more time to earn a degree. For 2002, the credit is phased out for single taxpayers with modified adjusted gross income between $41,000 and $51,000. The credit is phased out for joint filers with modified AGI between $82,000 and $102,000. In 2003, the single taxpayer phaseouts are unchanged; the phaseouts for joint filers, however, rise to $83,000 and $103,000. You can’t take the Hope credit for a student in the same year that you take the lifetime learning credit for that student or that the student withdraws tax-free funds from an Education IRA. For more information see IRS Publication 970, Tax Benefits for Higher Education. You can download it from the IRS Web site or order it by calling 1-800-TAX-FORM (829-3676).

Who is eligible for a Hope tax credit?
The Hope credit, part of the Taxpayer Relief Act of 1997, allows most Americans to take a credit of up to $1,500 a year for college tuition and related expenses in the first two years of college. The credit can be claimed for expenses for the education of the taxpayer, a spouse, or a dependent for whom a personal exemption is allowed. The credit is phased out for single filers with modified adjusted gross income between $40,000 and $50,000 and joint filers with modified AGI between $80,000 and $100,000. It’s important to note that the Hope Scholarship credit cannot be claimed by a student if the student is claimed as a dependent on another person’s tax return. For example, a college freshman who pays his own tuition would not be eligible for the credit if his parents claim him as a dependent. However, the parents could take the tax credit even though the tuition was paid by their son. You can’t take the Hope scholarship credit for a student in the same year that you take the Lifetime Learning credit for that student or make tax-free withdrawals from an Education IRA for that student. For more information see IRS Publication 970, Tax Benefits for Higher Education. You can download it from the IRS Web site or order it by calling 1-800-TAX-FORM (829-3676).

Are scholarships taxable?
Most scholarships and fellowships are tax-free, but there are some limitations. Scholarships and fellowships of a degree candidate are tax-free to the extent that the grant pays for tuition and course-related fees, books, supplies and equipment that are required for courses. Amounts for room, board, and incidental expenses are taxable. If you are not a candidate for a degree, your entire grant is taxable. The Internal Revenue Service’s definition of "degree candidate" is broad. You qualify if you are attending a primary or secondary school, college or university. Students at most trade and vocational schools are also considered degree candidates.

Is interest from savings bonds taxable if I use the money to pay for a college education?
Interest on U.S. government Series EE and Series I savings bonds, the most common types of savings bonds, might qualify for a federal exemption if used to pay for college. The interest on savings bonds -- which is already exempt from state and local income taxes -- may be exempt from federal income tax as well if you pay tuition at colleges, universities, and qualified technical schools during the year you redeem the bonds. The exemption applies not only to your children’s education but also to your own higher education. There are other requirements that must be met in order to avoid federal taxes on savings bond interest. First, the bonds must have been issued after Dec. 31, 1989, to persons who are at least 24 years old. Second, the bonds must be issued in either one or both parents’ names if the bonds are to benefit dependent children. In addition, the bonds must be redeemed in a year that the bond owner pays qualified educational expenses. The bonds will be fully exempt from federal taxes only if your income is below certain limits, and the exemption applies only to that portion of the money used for tuition and fees. For more information about Series EE and Series I bonds, contact the federal Office of Public Affairs, U.S. Savings Bonds Division, Washington, D.C. 20226 or visit TreasuryDirect.gov.

Is the interest on student loans tax-deductible?
You can generally deduct up to $2,500 in student loan interest payments (in 2002) even if you do not itemize deductions. Qualifying loans include any debt incurred to pay higher education expenses for yourself, your spouse, or a dependent at the time you incurred the debt. The student must have been enrolled on at least a half-time basis when the loan was made.
You cannot take this deduction if you use the Married Filing Separately filing status, or if you are claimed as a dependent on someone else’s return.

Can I deduct the cost of the MBA program I’m taking at night as an job-related expense?
In general, expenses for courses that lead to a degree are not deductible. However, the cost of an MBA program (or other university-level classes taken for credit) may be deductible as a job-related expense if the MBA is not a minimum requirement for your job, enhances your skills for your current position, and does not qualify you for a new business. Ordinarily, your deduction for job-related expenses, including education, is generally subject to the 2 percent of adjusted gross income (AGI) floor, which means you can only deduct the amount that, along with your other miscellaneous itemized deductions, is more than 2 percent of your AGI. Starting in 2002, however, you may qualify to take an above-the-line deduction for up to $3,000 of college tuition if your modified adjusted gross income is less than $65,000 ($130,000 if filing jointly).

Are there any tax issues involved in prepaid college tuition plans?
Some colleges now offer prepaid tuition plans. In a typical plan, you agree to pay a lump sum today and, in exchange, the college will guarantee your child four years of free or low-cost schooling. While such an arrangement can help you beat the high cost of college, earnings on the plan’s investments are tax-deferred. When the plan pays the tuition benefit, the difference between the purchase price and the benefit will be taxed. The good news is that if the funds are used for qualified higher education expenses, the investment earnings will be included as part of the beneficiary’s income; therefore, the earnings will be taxed at the student’s tax rate rather than the purchaser’s tax rate.

Can I pay income to my children to help save for their educational expenses and also save on my taxes?
If you own your own business, a good way to start saving for your child’s college education is to put your son or daughter on your payroll. Doing so will reduce the taxable business profits you must report to the Internal Revenue Service, while the income your child collects will be taxed at the child’s lower individual tax rate. If you decide to hire your child, you will have to pay a fair-market rate for the work that is done. Keep careful records documenting that the child did the work for which he or she was paid because the IRS may ask to see them. Employing a child isn’t just a good way to start building a college nest egg. It can also help your son or daughter develop a sense of responsibility and skills they can use later in life.

If I set up a 2503(b) trust to pay for my children’s education, is it exempt from gift taxes?
A useful way of funding college costs is to set up a 2503(b) trust, named after the Internal Revenue Code section that created them. Such a trust works especially well when large sums are involved. Parents can contribute up to $20,000 per year per child to this kind of trust and still qualify for the annual gift tax exclusion. Funds within the trust can be accumulated and principal payments delayed until college. A 2503(b) trust requires that all income be paid annually or more frequently to the beneficiaries, but principal payments can be delayed until 21 years of age. Income distributions can be planned by various investment strategies, and principal can often be left in trust for periods of time exceeding the child’s 21st birthday.

If my parents pay for my daughter’s schooling, what are the tax implications?
There are two popular tax-favored methods whereby grandparents can help with their grandchildren’s education.The first method is to make a gift under the Uniform Gifts to Minors Act (UGMA). Each grandparent can give up to $12,000 per child annually free of gift tax, which should be placed in a UGMA account in the grandchild’s name, with the parent or grandparent as custodian. As long as the child is younger than age 18, his or her account can generate up to $850 of income per year without taxation. Income from $850 to $1,700 is taxed at the child’s tax rate. Income exceeding $1,700 is taxed at the parent’s highest marginal tax rate.The second option is for the grandparents to purchase Series EE or Series I bonds, or give the money to the grandchild’s parent (who must be at least age 24) to buy the bonds. If the bonds are later cashed and the money used to pay qualified higher education costs for the grandchild, the interest will escape taxation. The exclusion is phased out for higher-income taxpayers. Series I bonds have the additional feature of being indexed to inflation. Maximum annual purchases of Series I or Series EE are $30,000.

What's the best way to save for college -- a 529 plan, a Coverdell education savings account or a Roth IRA?
A state-sponsored 529 plan gives you the straightest shot to a paid-up education. The plans set no limit on how much you can kick in each year, and, depending on the state, you can contribute as much as $305,000 without paying federal tax on the earnings if you use the money for qualified education expenses, such as college tuition. Most states won't tax your earnings, either, and 24 states plus the District of Columbia will let you deduct your contributions if you invest in your home state's plan. On the down side, 529 plans limit your investment options to the portfolios offered by each state. You're allowed to change the investment mix within a plan or switch to another state plan only once a year.

The advantages of a Coverdell account are that you can pick pretty much any fund or stock to invest in, and the money can be used for tuition bills at private elementary and secondary schools. You reap the same tax-free earnings on withdrawals as you do with 529 plans, as long as the money goes toward qualified education expenses. One disadvantage: No more than $2,000 per year can be saved for each beneficiary. Singles who earn more than $95,000 and married couples earning more than $190,000 cannot fully fund a Coverdell, and contributions must stop when the beneficiary reaches age 18.

It's tough to save for both retirement and college. A Roth IRA might be your ticket. Although primarily for retirement savings, Roths make a nice parking place for college money because contributions can be withdrawn at any time without tax or penalty. You can also withdraw earnings to pay college costs without being penalized, but you will owe income tax unless you're over 59½. Just don't use all the money for your children's education, or you'll end up depending on your kids to support you in your old age.

What's the best 529 plan?
Ask this of your own state's 529 plan: Do you feel comfortable with the investment options, and is it cost-effective -- expenses of 1% or less per year? Yes both times? Then the best plan is the one closest to home.

We especially like the 529 plans (open to residents of any state) run by Michigan, Minnesota, Missouri and New York, all of which offer conservative portfolios with respectable track records and low fees. Each plan's investments are managed by TIAA-CREF, which takes a balanced approach in its age-based portfolios, concentrating on stocks when your children are young and then shifting toward more conservative bonds and other fixed-income investments as their college years approach. Slightly more aggressive are plans in Utah, Iowa and Nevada, which invest in low-cost Vanguard index funds.

Will I lose out on financial aid if I save too much for college?
At today's prices, how can anyone save "too much" for college? Don't worry about shooting yourself in the foot by saving. It's your salary that takes the big hit when the government figures how much you can afford to pay: You are expected to be able to send up to 47% of your income to the bursar. Only a relatively paltry 5.6% of parents' savings is tapped -- and that's after a chunk is exempted based on your age and family size.

Say you have $50,000 in savings and, at age 50, you're the elder spouse. The federal aid formula ignores the first $47,700, leaving just $2,300 for the 5.6% squeeze. So 50 grand in savings can't cost you more than $129 a year in aid.

And, speaking of aid, at least half of it is likely to be loans. With nothing set aside, you could wind up borrowing big-time.

How can I help my grandchildren with college expenses?
Open a 529 plan or Coverdell education savings account on behalf of your grandchildren.

If time is short, or if you want to keep control of the money yourself and don't want to commit to a college-savings account, make tuition payments in any amount directly to your grandchildren's schools when the time comes. Such payments aren't limited by the annual gift-tax exclusion of $12,000 -- the maximum amount you can give an individual each year without having to worry about gift taxes.

Or, if you want to reward your grandkids for their hard work (and be sure you get your money's worth), help them pay off student loans after they graduate.