| “In 2012, I purchased a 4 year scholarship for my child. The entire amount was paid in 2012, but the scholarship is applied over the next 4 years. Should I deduct the entire amount actually paid in 2012, and none in the next 3 years, or should I claim 1/4 of the amount in each of the next 4 years?”===========> The federal government, along with most state governments, grant favorable tax treatment to these investments in education; There are tax benefits on earnings, but you may not deduct these contributions on your income taxes. In fact, you may have to pay a gift tax on annual contributions that exceed the set limit. The IRS set the limit at $13K per year as of 2011. The federal government does not impose taxes on any interest earned on investments through prepaid college plans. You must use the money to pay for qualifying college expenses for the named beneficiary. Qualifying expenses include tuition, books, college fees and computer technology designated for educational purposes. Some plans include funding for on-campus room and board as well. The government tax exemptions only apply to withdrawals from a 529 plan that go toward such expenses. States sponsor prepaid college plans and encourage residents to invest in state colleges and universities. Some states make all qualified tuition plan earnings tax exempt, even those from out-of-state plans. Other states only give favorable tax treatment to plans for future students of home-state colleges. Still other states tax the earnings on all prepaid plans. Many states also tax certain transactions, such as rolling funds into a local plan from an out-of-state plan.
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