Dear Tax Talk:
My daughter's spring tuition isn't due until January, but is there an advantage in prepaying it before the end of the year?
-- J.J.

Dear J.J.,
There are an array of tax credits and deductions for higher education tuition. Depending on your income level, the amount of tuition paid and your child's time in school, one of them may be right for you to save taxes.

The tax benefits for tuition fall into three categories. From the more restrictive to the least, they are:

1. The Hope Credit
2. The Lifetime Learning Credit
3. The tuition and fees deduction

A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Generally, the credits or deductions are allowed for qualified education expenses paid in 2007 for an academic period beginning in 2007 or in the first three months of 2008.

The Hope credit is more restrictive, as it is only allowed for the first two years of your child's higher education. Also the child must be enrolled at least half-time, pursuing a degree and not have a felony drug conviction.

The Hope Credit (per eligible student) is the sum of:

1. 100 percent of the first $1,100 of qualified education expenses you paid for the eligible student 2. 50 percent of the next $1,100 of qualified education expenses you paid for that student

The maximum amount of Hope Credit you can claim in 2007 is $1,650. The Lifetime Learning Credit is 20 percent of the child's tuition and fees up to a maximum of $10,000 in costs, or $2,000 in credit per student. Both credits will phase out when a parent's adjusted gross income, or AGI, as modified exceeds $47,000 ($94,000 in the case of a joint return).

If your AGI doesn't allow you to claim either of the credits, the deduction may be beneficial. You can deduct up to $4,000 (in total, not per student) in tuition and fees as an adjustment to your gross income. You can claim the deduction without having to itemize your other deductions on Schedule A.

If your modified adjusted gross income, or MAGI, is not more than $65,000 ($130,000 if you are married and filing jointly), your maximum tuition and fees deduction is $4,000. If your MAGI is larger than $65,000 ($130,000), but is not more than $80,000 ($160,000 if you are married and filing jointly), your maximum deduction is $2,000. No tuition and fees deduction is allowed if your MAGI is larger than $80,000 ($160,000). This deduction is set to expire for tax years after 2007.

You cannot claim a deduction and a credit, or two different credits for the same student in the same year. You can choose whichever credit or deduction otherwise allowable that will save you the most tax. Depending on which credit or deduction is most beneficial you may want to consider prepaying the 2008 tuition. IRS Publication 970 provides more information on tax benefits for education.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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