A recent series of articles on tax law changes for 2002 elicited many letters from readers with tax questions. To help answer your questions, below is the first installment of a regular column focusing on taxes.

Question: I am a Florida resident serving in the military, so I pay no state taxes. If I signed up for the Rhode Island 529 college savings and prepaid tuition plan, I'd have to pay Rhode Island state taxes on the money I pull out of it. States that have no state income taxes (Alaska, New Hampshire) offer me a much better deal. -- Kevin

Taxes in 2002: Investing for Education

Taxes in 2002: Retirement Plans

Taxes in 2002: Estate Planning

Actually, that's not true. As far as state taxes go, it doesn't matter where your 529 is located; it just matters where you are. And lucky you -- besides an abundance of homegrown Key limes and early bird seafood specials -- fortunate Sunshine State residents enjoy a tax break on 529s.

As it happens, the state is just rolling out its 529 college savings plan this spring (it already has a 529 prepaid tuition plan). But it has already said it won't tax withdrawals on the accounts. The state taxes assets, not income, and it excludes 529s and Coverdell accounts from the list of taxable assets. "The reason there is no tax is because there's no income tax in Florida on anything, and 529s are exempt from the intangible tax

on assets," says Colleen Englert, director of marketing for the Florida prepaid college program.

In short, withdrawals from your 529 account will be free of both federal and state taxes if you remain in Florida.

But if you're opening a 529 account that you'll need 10 or 15 years from now, it's at least possible -- especially because you have a fairly mobile career in the military -- that you'll no longer live in Florida by the time you withdraw money from it. In that case, you'll be subject to the tax laws of whatever state you reside in.

Fortunately, says Tara Unverzagt, a certified financial planner in Torrance, Calif., "The trend is for states to not tax these earnings, just as the federal government does."

For information on Florida's prepaid and college savings plans, call 800-552-4723 or visit

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Question: I have an educational IRA for my son and have already contributed the maximum $2,000 for this year. My question is whether I can fund both an educational IRA and a 529 plan in the same year. -- David

The folks who pushed through

rule changes for college savings accounts did investors a big favor. Among other new benefits, starting this year you can now contribute money to both kinds of savings accounts. Previously, you could contribute to only one.

The only catch is that you must meet certain income requirements to be able to contribute the full $2,000 to a Coverdell education savings account, formerly known as an education IRA. See our previous

story on investing for education to find income guidelines for the Coverdell.

There are no income restrictions on contributing to a 529 college savings plan.

Provided you meet the income guidelines, says Tara Unverzagt, you could put $2,000 into a Coverdell and $9,000 into a 529 plan for a given recipient this year, for a total of $11,000. That's the annual amount you're now allowed to give away to one recipient, tax-free. Anything above that will count toward your lifetime gift tax exemption of $1 million.

If you're married, your wife could contribute an additional $11,000 toward a 529 this year. In that case, you and your spouse could give $2,000 to a Coverdell and $20,000 to a 529 plan.

And there's one more possibility: If you have lots of cash on hand, you could front-load your 529 contributions. If you're single, you could give up to five years' worth of allowed contributions under the gift tax rules, or $55,000, minus any sum you contributed to the Coverdell. So if you gave $2,000 to the Coverdell, you could put $53,000 into the 529.

However, if you choose to front-load gifts, be aware that you'll use up your gift tax exemption for the next five years. In that case, any additional funds you give your son in the next five years (including more contributions to the 529 or Coverdell) would count against your lifetime gift tax exemption.

Finally, if you're married and want to front-load your contributions, you and your spouse could give $2,000 to a Coverdell and up to $108,000 for the 529. You can repeat this for each child.