If you have a child (or a grandchild) who is going to attend college in the future, you have probably heard about qualified tuition programs, also known as 529 plans (for the Internal Revenue Code section that provides for them), which allow prepayment of higher education costs on a tax-favored basis.
There are two types of programs: prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won't be starting college for some time; and savings plans, which depend on the investment performance of the fund(s) you place your contributions in.
You don't get a federal income tax deduction for the contribution, but the earnings on the account aren't taxed while the funds are in the program. A deduction is allowed for Pennsylvania taxes. You can change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax consequences.
Distributions from the program are tax-free up to the amount of the student's qualified higher education expenses. These includes tuition, fees, books, supplies, and required equipment. This would include purchasing a computer and related technology and services such as internet access. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.
Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax is also imposed.