529 Plan and College Savings

Question: Can tuition be tax deductable if paid from 529 funds?

I have a BA in Music and plan to start part time employment working for myself (playing, teaching, etc.) I have reviewed IRS Publication 970 (http://www.irs.gov/publications/p970/ch13.html) and based on this am confident that I can get a Masters in Music, and treat it as a business expense, assuming that I am already working. (Reason: it further trains me in a job that I am already working at rather than preparing me for a new job.)

However, I am also planning to save up for the Masters Degree before I start. It seems reasonable to save for the degree in a 529 Plan so I can avoid taxes on any gains or interest (and my state, Maryland, also provides a tax deduction for the contributions to the plan).

My question is: Can I both save for tuition using a 529 (and get those tax breaks while I am saving) and also claim the (part-time) educational expense as a business deduction (to get the tax breaks offsetting my earnings after I pay the tuition)?

Thanks
Dale

Answer: If you claim the tuition as a business expense (which is much harder than you realize), the same tuition money cannot be used for the 529 Plan. The earnings would be income and subject to a 10% penalty.

College Savings Plans of Maryland 2 of 5

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