School's back, along with the bills

It's been an exciting week for America's schools.

First there was the President's address to students and the attendant folderol.

Now government money men are getting in on the education act.

On Thursday, the Treasury Department released its analysis of 529 plans that it prepared for the White House Task Force on Middle Class Working Families.

Named for the section of the tax code which created them, 529 plans offer tax-favored ways to pay for college. According to the Treasury report, plan tax benefits can increase the effectiveness of saving by between 6 percent and 39 percent depending on the tax bracket of the saver, the length of the savings period and whether there is a state deduction or credit for contributions.

But even though the plans are popular, Treasury suggests five ways to make 529s more "attractive, effective and reliable for middle class families, and those who aspire to join the
middle class through college attendance." The recommendations include:

• Provide age-based index funds. Age-based investment funds are very popular and are well suited to the circumstances of many middle class families that are saving for college. Yet five of the 48 states offering a direct sold savings plan do not offer an age-based fund. Moreover, only 23 of the 43 states that do offer an age-based fund offer it in the form of index funds.

• Eliminate home-state bias. If home-state bias in state tax and student aid policies were eliminated, the result would be more investment options for consumers, more intense competition between plans, and very likely lower fees.

• Set per beneficiary contribution limits. Per beneficiary limits would reduce the tax benefits to high income families and, by lowering federal tax expenditures for the program, would potentially free up federal resources for education aid that could be targeted to low and middle income families.

Details on these recommendations, as well as background on and additional analysis of 529 plans, can be found in the 37-page Treasury report.

Computer add-on: One enhancement to 529 savings plans that's available in 2009 and 2010 is the ability to use the funds to to buy computer equipment and services.

Under provisions of the American Recovery and Reinvestment Act, or stimulus bill, expenses for computer technology and equipment or Internet access and related services that an eligible student can use at school are allowed.

Of course, the student must be enrolled at an eligible school. And computer games don't apply, regardless of how much your child may argue that there's educational value to Grand Theft Auto.

This use of tax-favored money for computer software and technology is specific to 529 plan money. Such expenses don't count for other popular educated related credits and deductions.

IRS gets into the act: if you're unsure about exactly what 529 plans and other tax-favored educational options offer or disallow, you now can find out at a new IRS Web page.

The tax agency has created an online education tax breaks section that features available tax credits, deductions, savings plans and more that can help students (and their parents) pay for school.

So if you're in school, about to go to school or are the parent of a student, check out the ways the tax code can help. Your homework could pay off.

Related posts:

• 529 facts
• Filling out your pet's tax return and paying your kids' college costs
• Tax help for education costs
• Rags, riches and college costs
• Education Costs 101: Tax-saving ways to pay for school

Blackboard courtesy Dave/morgueFile.com