College Education
Tax Saving Strategies (Sept. 30, 2008)

According to the latest figures, the cost of a year's education runs around $24,000 at a private four-year college and over $6,000 at a public college -- and the costs are increasing by more than 6% annually. Fortunately, the tax law does offer a number of tax breaks that provide relief to families facing escalating college costs. Here is a quick look at some of the key breaks available for families saving for and paying for college.

Hope Credit
You can claim the Hope Credit for tuition and related expenses you incur for yourself, your spouse or your dependents for at least half-time enrollment during the first two years college or vocational training. The credit for 2008 equals 100% of the first $1,200 of out-of-pocket expenses plus 50% of the next $1,200 of out-of-pocket expenses. The credit is phased out for higher income taxpayers.

Lifetime Learning Credit
The Lifetime Learning Credit is available for higher education not covered by the Hope Credit. The credit amount is equal to 20% of the first $10,000 of out-of-pocket tuition and related expenses. Only one Lifetime Leaning Credit can be claimed on a tax return (i.e., the credit is effectively available on a per family basis) while a Hope Credit can be claimed for each eligible student. The Lifetime Learning Credit is also subject to a phase-out for higher income families but it does not require at least half-time enrollment.

Scholarships
Scholarships are generally tax-free except to the extent that they cover room, board, transportation, or are in return for services rendered by the student.

Student Loan Interest Deduction
If you are liable for repayment, you can deduct interest paid on loans used to pay for college tuition and fees, room and board, books, supplies and equipment, and other necessary expenses such as transportation. The deduction is limited to $2,500, is phased-out for higher-income taxpayers, and is not available to someone who can be claimed as a dependent on someone else's return. The interest deduction can be claimed whether or not you itemize your deductions on your return.

State Section 529 Plans
You can save for college costs on a tax-favored basis through a state-sponsored "Section 529" plan (named for the section of the Internal Revenue Code authorizing it). Also know as qualified tuition plans, Section 529 plans fall into two categories: (1) prepaid plans, and (2) savings plans. Prepaid tuition plans allow you to purchase tuition years in advance of attendance at a discounted present day price, while savings plans offer market-based returns on contributions you make to the plan. In both categories of plans, your contributions are not deductible but grow and compound tax-free until withdrawn. If funds are withdrawn to pay qualifying college expenses, then no income tax will be due on the withdrawal.

Coverdell Education Savings Account
A Coverdell education savings account (ESA) is another tax-favored college savings vehicle. You can open a Coverdell ESA at any bank in the U.S., or at any other institution that has been approved by the IRS. You can make nondeductible contributions of up to $2,000 a year (subject to an income phase-out) on behalf of any child under age 18. The earnings on the account are tax-free as long as the funds are used for qualifying education expenses.

U.S. Savings Bonds
If you own eligible U.S. Savings Bonds, you can avoid income tax when you cash them in to the extent the proceeds are used for the college education of yourself, your spouse or your dependents. The tax exemption is phased out for higher income taxpayers and is only available on Qualified U.S. savings bonds are any series EE bonds issued after 1989 or series I bonds.

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