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Special section Experts' 8 smart moves for '08

There are eight things to keep in mind if you are saving for college in the coming year, says the College Money Guru.

8 smart college money moves

8 smart college money moves in '08

There are eight things to keep in mind if you are saving for college in the coming year.

8 smart college money moves in '08

1. Grab a state income tax deduction. More than 30 states offer a generous tax benefit -- either a state income tax deduction or, better yet, a tax credit -- for residents making contributions to a 529 plan. What better way to boost your college fund?

Make sure you understand the rules in your own state. In many states, the benefit is restricted to those using the home-state 529 plan. And you may want to take steps to maximize the tax savings by opening multiple accounts or by spreading your contributions over more than one year. Even with a child close to college age, it can make sense to open a 529 account, as most states do not impose a minimum holding period.

Use Bankrate's 529 college-savings-plan estimator to see if these plans are right for you.

2. Steer clear of the kiddie tax. Saving income taxes by investing in your child's name becomes a more difficult proposition in 2008. Recent tax law changes expanding the so-called "kiddie tax" will result in higher taxes for millions of American families.

What is the kiddie tax? It is a levy assessed when your child's total interest, dividends, capital gains and other "unearned" income in excess of $1,800 (in 2008) is taxed at the rate of your tax bracket, not your child's. Previously, the kiddie tax ended when a child turned 18. But in the future, the kiddie tax will be imposed on full-time college students up until the year they reach age 24.

One remedy to the kiddie tax is to arrange your investment strategy so as to avoid having your child recognize more than $1,800 in unearned income. If you have children who are now between the ages of 18 and 22, you might even want to trigger capital gains before the end of December, since children in that age bracket are not subject to 2007's kiddie tax, but will be subject to the 2008 tax.

For younger children, avoid socking away too much in a Uniform Transfers to Minors Act (UTMA) and instead use tax-free 529 plans and Coverdell education savings accounts. Another potential remedy under the 2008 kiddie tax involves children ages 18 to 23 -- they escape the extra tax if their wage income exceeds one-half of their total support. The calculation of "support" can get tricky so you may want to discuss this with a tax professional.

3. Be grateful for grandparents. Surveys suggest that many grandparents are happy to help finance their grandchildren's college education. But grandparents are also concerned about having enough money to maintain their own lifestyles in retirement, and about keeping an adequate cushion for other needs, such as future medical expenses.

A 529 plan can be the perfect solution to this dilemma, for one simple reason: the account owner can request a withdrawal of money from a 529 plan at any time and for any reason (subject to tax and 10 percent penalty on the earnings). Of course, most grandparents will never seek a refund, and will eventually use the funds for the intended purpose of paying college bills.

Most 529 plans also permit grandparents and other third parties to make contributions directly to an account already established by the parent, a useful approach for grandparents with no desire to become account owners.

4. Go for the scholarship money. Private organizations dole out more than $3 billion in scholarships each year. Begin your scholarship search by checking with the guidance department at your child's school. Free online scholarship search engines will also turn up some opportunities -- just be sure you are comfortable with how your personal information is used.

The most valuable scholarships and grants are those offered directly by the college your child will be attending. According to the College Board, institutions provided more than $20 billion in institutional grant aid for undergraduate students in the 2006-07 school year, and a significant portion of this money went to students without regard to their financial need.

Above-average high school grades, challenging course selections, unique backgrounds or interests, and musical or sports prowess are among the characteristics for which colleges are willing to pay.

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