Let Uncle Sam help pay for college

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 several tax credits.

The American opportunity credit, created as part of the 2009 stimulus bill, replaces the Hope credit through the 2017 tax year. The American opportunity credit has several features that make it more appealing than its predecessor.

The American opportunity credit is worth more than the Hope credit, $2,500 versus the previous $1,800. You can count expenses incurred during the first four years of postsecondary education in figuring the new credit. And best of all, up to 40 percent of the new credit is refundable. This could get you up to $1,000 back from the IRS even if you owe no taxes.

The lifetime learning credit 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 full time. The lifetime learning 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 learning 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 Form 1040 and Form 1040A and could reduce your taxable income by as much as $4,000. This deduction technically is temporary, but for the past few years Congress has renewed the tax break. While this deduction is available for 2013 taxes, it expired at the end of last year. It must be renewed for tax year 2014 and beyond.

Although its above-the-line status makes this tax break more available, it does have some limits. Single filers who make less than $65,000 or married joint filers earning less than $130,000 can take the full deduction. If you make more than those amounts, but less than $80,000 as a single filer or $160,000 when married filing jointly, you can deduct up to $2,000 in tuition and fees. 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. However, to take advantage of this deduction, your modified adjusted gross income must be less than $75,000 if you're a single filer or less than $155,000 if you're married and file a joint return. 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.


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