529 tuition plans confuse this reader

DEAR HARRY: I just started a 529 Tuition Assistance Program (Qualified Tuition Program) for our 7-year-old daughter. I'm getting a lot of confusing information about just how it works. I hope you can enlighten me. What are the tax rules for both my federal and state taxes? How much can I contribute? Can I move from the plan I selected hastily last week to another, and I hope better, investment program? Suppose my daughter decides not to go to college? Thanks for your help.

What Harry says: The federal deal gives you no current deduction. You may contribute up to five times the annual gift-tax exclusion (up to $65,000 per individual contributor or $130,000 for husband and wife) with no gift-tax payment due. Anything above $26,000 would require a gift-tax return (form 709). However, there is no limit to the amount you can contribute. The income the plan earns is not taxable. Distributions used for tuition, supplies and books is not taxable. You may make a transfer of plans once in any 12-month period with no tax consequences. Pennsylvania rules allow a deduction up to the federal tax exclusion ($13,000 or $26,000). Transfers are not taxable as in the federal case. Withdrawals are not taxable if used for tuition, books or supplies, so you get a double benefit. For withdrawals not used for these purposes, the full withdrawal will be taxable in Pennsylvania, and the income accumulated will be taxed federally. Hope this helps.