Children should file tax returns to get refunds

In a recent column you noted that children don't have to file a tax return as long their earnings are less than the standard deduction. That's true. But they should file if they would like to get back federal withholding. The same applies to filing a state tax return. And in our county, children under 18 don't have to pay city taxes, so they have to file a city return to get their withholding returned to them. Sometimes all that can add up to good pocket change. Sign me a grandma who tries to look after her grandchildren.

Your grandchildren are lucky to have you. You're correct that kids should file a tax return in order to get back money that was withheld from their paychecks. One caveat: Social Security taxes aren't refundable.

I have a college-age daughter who earned $10,000 in 2007 working part time. Can I contribute to her IRA and take a deduction on my return? I think I read that you can take 50 percent of the contribution as a parental deduction.

Sorry, but you aren't entitled to a deduction. Your daughter's earned income qualifies her to contribute to an IRA for 2007, and she has until April 15 to do it. For 2007, the contribution limit is $4,000 ($5,000 for 2008) or the amount of her earnings, whichever is less. You can give her the money to contribute, but no matter where the cash comes from, your daughter gets the deduction.

Because your daughter's income is so low, a deduction won't have much impact. She would be better off contributing to a Roth IRA. There's no upfront tax break with a Roth, but withdrawals in retirement are tax-free. I have a tax question about 529 college-savings plans. I'm already in college but probably have about four years left including law school. Can I open a 529 plan for myself, invest in something low-risk, such as a money-market fund, and use the money to help pay down school loans when I graduate?

Unfortunately, you can't. You can use money from a 529 plan tax-free for qualified educational expenses, which include tuition, fees, books, supplies, equipment, and room and board, within certain limits. But student-loan repayments aren't on the list.

Joseph Hurley of Savingforcollege.com says the IRS will count a student loan only for the year in which the loan is taken out to pay eligible expenses, not for the year the loan is repaid.

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Janet Bodnar is deputy editor of Kiplinger's Personal Finance magazine and the author of "Raising Money Smart Kids" (Kaplan, $17.95). Send your questions and comments to moneypower@kiplinger.com.