Muffin, the article I referred to also points out that there is a way to improve the tax situation for your step-daughter’s situation. It looks like the intent was help folks like your family and target folks that have been taking advantage of a tax loophole.
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The change also makes 529 college savings plans more attractive, financial experts said. Parents can invest large sums in these accounts and the earnings are tax-free provided the money is used for college. (This tax break disappears in 2011, unless Congress steps in.) Plus, many states give residents a tax break on their contributions to a home-state plan. A 529 account is often owned by a parent with the child as the beneficiary.
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