Tax-Smart Ways to Help Your Kids

Uncle Sam (and some states) give a little back when you help pay college bills or save for their future.

Generosity may be its own reward, but it's even better when your gift garners a tax break. There are several tax-smart ways to help your kids or grandkids:

Feed a 529 plan. Money in a 529 plan may be used tax-free for college costs, and you may get a state income-tax break for your contributions. To qualify for a state tax break, you usually need to contribute to your own state's 529 plan (although five states -- Arizona, Kansas, Maine, Missouri and Pennsylvania -- allow a deduction for contributions made to any state's plan). Some states let anyone take a tax deduction for their contributions; others give the tax break only to the owner of the account. But there's no limit to the number of 529 accounts that may be opened for one child, so parents and grandparents, for example, can open separate accounts and deduct contributions (see details about each state's plan and tax rules).

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Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.