When they are really young, start saving in a 529 or Coverdell college-savings plan. The earnings are tax-exempt if used to pay for education. Even $50 a month starting when they are born should grow to more than $20,000, which should buy a book or two in 2020.
Buy stocks for yourself and give them to your kids later. Until children reach 14 they are taxed at your rate, so you won’t save anything on investment income they earn early. After 14 they are taxed at their own, lower rate. It’s likely that your capital-gains rate is 15 percent and your child’s is 5 percent. In 2008, for one year only, the capital-gains rate for the lowest tax bracket will be zero. Buy stocks today, let them grow (you hope) and give them to your teenager to sell in 2008. She can avoid tax on the gain and use the proceeds for college. Or tattoos. Her choice, once you hand over the assets.
File separate tax returns for your children. Even a toddler with interest income can push you into a higher bracket or force you to lose deductions if you include him in your tax return. Once Junior starts earning money and spending it on college, consider letting him take his own exemption, instead of claiming it on your return. This works when the parents earn more than $83,000 ($41,000 single) and start losing eligibility for the lucrative Hope Scholarship and Lifetime Learning credits. It works even better when the parents earn more than $209,250 ($174,400 single) and start losing the exemption, too. In this case, the offspring can take the exemption and the credit (assuming the tuition comes out of his account). But somehow, you’ll still end up with the bill.
