And as with a 529 plan, if your child doesn't use all the Coverdell money, it can be rolled over to a plan for another family member.
Educational tax credits
Tax credit amounts are subtracted directly from any tax you owe, usually making them a better tax break than deductions, which reduce your taxable income amount. When it comes to education, the tax code offers two popular tax credits.For the 2008 tax year, the Hope Credit helps pay for up to $1,800 in expenses for a freshman or sophomore college student. The credit is per child, so if your son and daughter are in their first two years at State U., then you can claim this credit for each child's eligible expenses. It also can be used for community college or vocational school costs.
The Lifetime Learning Credit is more expansive. This tax break can be used by any student at any level -- undergraduate, graduate, or even course work to improve job skills -- and the student doesn't have to be enrolled fulltime. The Lifetime Credit is 20 percent of up to $10,000 in educational expenses, meaning you could get a possible $2,000 credit. Also note that the $10,000 limit applies to all educational expenses, not per student. So if you have several kids in college and their total expenses are more than $10,000, the amount in excess of that won't count toward the Lifetime Credit.
Tuition and fees deduction
This tax break is an above-the-line deduction that can be claimed regardless of whether you claim the standard deduction or itemize. It's found on both Form 1040 and 1040A and could reduce your taxable income by as much as $4,000. This deduction technically is temporary, but for the last few years, Congress has renewed the tax break.Although its above-the-line status makes this tax break more available, it does have some limits. If you make over a certain amount, your deduction amount is reduced. If you claim one of the education tax credits, you cannot use this deduction for other expenses by the same student in the same year.
You can, however, take the tuition and fees deduction, as well as distributions from Coverdell ESAs and 529 plans, as long as you paid for different educational expenses with the various funds.
Student loan interest deduction
This is another above-the-line deduction that enables you to deduct up to $2,500 in student loan interest. It, too, is phased out for higher-income taxpayers. If you're married, you must file a joint return to take this deduction.Savings bonds
When you cash in U.S. savings bonds, you must pay tax on the deferred interest that the bonds earned. But if you use the bonds to pay for educational expenses, the interest could be tax-free.