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529 plans can pay for computers and Internet service

Tax-free college savings plans and prepaid tuition programs – known as “529 plans” – can be used to buy computer equipment and Internet services for students during 2010. This change was part of the stimulus bill enacted by Congress last year.

Many grandparents and other relatives set up 529 plans (named for section 529 of the federal tax code) to help young people with college expenses. Family members can contribute up to $13,000 a year to these plans ($26,000 for a couple) without incurring gift tax. The money can then grow in the account tax-free. Family members who want to quickly get money out of their estate for tax reasons can “front-load” their contributions and give $65,000 right away (or $130,000 for a couple), as long as they don’t make any other contributions for five years.

The money in the account can be used to pay for college tuition, room and board, or other expenses. In 2010, these expenses include computer equipment and Internet access. (However, the money can’t be used to buy software for sports, games or hobbies, unless it is predominantly educational in nature.)

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