Another stimulus bill perk; tax-free funds for tech upgrades

Among the casualties in the Washington deal-making to get the economic stimulus package passed was substantive assistance for all families with college-bound students. An early proposal to boost the loan limit for unsubsidized federal Stafford loans by $2,000 per year—a loan available to all comers regardless of family income- failed to make the final cut. (The just-signed legislation does indeed provide more college aid for low-and moderate income families through increases in the Pell grant program and a new $2,500 college-cost tax credit.)

But Congress did throw a small bone the way of college-saving parents: in 2009 and 2010 the purchase of computers, computer equipment and even Internet service used by your college-age kid can be paid for out of your 529 college savings account. Yep, you get to use tax-free dollars to cover computer costs. And it’s not just your kid’s computer costs; the legislation says tax-free 529 funds can be used to make computer purchases for the “beneficiary’s family” as long as the beneficiary-your college student-uses the equipment too. (A simple workaround: have your kid work on her psych 101 paper on the new family computer the next time she swings by for a visit.) Your child must be enrolled in college in 2009 or 2010 for the tech purchases to be covered.

Now, Congress did draw the line at "Rock Band:" computer games used for pure gaming purposes aren’t included as a qualified expense. But the legislation did make an exception for software that has an educational purpose, so theoretically you might be able to make the case that Rock Band qualifies for music majors, or Madden NFL ’09 for phys-ed majors. Test the IRS’s patience at your own peril.

Now, of course, the primary use of your 529 is to pay for college tuition. But if you find yourself in the surprising situation of having some extra money tucked away for school-perhaps your kid snagged more aid than you anticipated-you can now fire up a new family computer paid for with tax-free savings from your 529 plan.

– Carla Fried