The College-Savings Superpage

The tax breaks for college are better than ever -- if you know the ins and outs. Here's a guide.

Think the only way you'll be able to foot your son's or daughter's future college bills is by winning the lottery? Think again. While the soaring costs of college can be overwhelming, a bit of careful planning can help you leap over this financial hurdle. In fact, thanks to some generous tax code changes, it's now easier than ever to save.

But it also can be terribly confusing. Should you invest in a 529 plan or an education savings account? When you file your taxes, should you claim the Lifetime Learning Credit or the Hope Scholarship Credit? That's where our College Saving Superpage comes in. We've broken down your college-savings options into two categories: your investment options (which you'll see below) and your tax breaks (located on the following page). And we've created a worksheet to help you evaluate the dozens of 529 plans out there.

The idea: to help you find the best way to stretch your college dollars. That's something even those of us who didn't earn an A in accounting can appreciate.

What's AGI?
Your adjusted gross income is the number at the bottom on page 1 of your 1040. Specifically, it's your gross income minus so-called above-the-line deductions. These are deductible IRA contributions (as well as deductible SEP, SIMPLE and Keogh contributions), the student-loan-interest deduction, deductible contributions to medical savings accounts, moving-expense deductions, half of the self-employment tax paid by self-employed individuals, the deduction for health-insurance premiums paid by self-employed persons, the deduction for higher education expenses; the deduction for penalties on the early withdrawal of savings and the deduction for alimony payments. AGI doesn't include the standard deduction or itemized deductions. However, the key for calculating your eligibility for education savings accounts is actually modified AGI, or MAGI. This is your AGI (as explained), increased by certain foreign earned income and housing costs for those living abroad as well as certain offshore income, all of which is excluded from taxation.

What are UGMAs/UTMAs?
These are custodial accounts for kids that can be set up under applicable state law. The custodian (generally the parent) maintains control over account until beneficiary reaches age of majority, although the account is taxed at the beneficiary's rate (assuming the kiddie tax doesn't apply). There is very little difference between an UTMA (Uniform Transfers to Minor Act) account and an UGMA (Uniform Gifts to Minor Act) account, although UGMAs have stricter rules as to what can be held in the account. A handful of states mandate UGMAs, while most mandate UTMAs.

What's a Crummey Trust?
A Crummey Trust is a trust set up for a minor, often to hold funds intended for the child's future higher education costs. The beneficiary is doled out money according to the terns of the trust document. These trusts allow you to have longer control over the account than an UTMA or UGMA, although they're costly to set up. Be prepared to spend at least $1,000.