College tax credits that pay

Your Money

December 10, 2006|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,Chicago Tribune

With college costs acting like a Grinch on stressed-out household finances, families can't afford to miss out on tax savings they can secure with a little end-of-the-year planning.

Whether you are paying off loans for your education or paying tuition for a child in college or technical school, you can enlist Uncle Sam to help you.

And you should, because most families need all the help they can get.

Here are some steps to take before year's end.

When parents or students pay for tuition for technical training, college or graduate school, Uncle Sam will help, sometimes with more than a $2,000 refund on taxes each year if income levels fall within a particular range.

But waiting until tax time to find out that your pay was too high could undermine your ability to qualify for tax credits, which reduce your tax bill dollar for dollar.

The goal: qualifying for the Hope Credit for students in their first two years of college, or the Lifetime Learning Credit, which applies for education during college, graduate school, technical training or extra courses later in life.

The Hope Credit might provide you with a tax refund of up to $1,650 a year per student. The maximum Lifetime Learning Credit each year is $2,000 per family. Since the Hope Credit applies to students early in college, and the Lifetime applies to other students, a family with multiple children in college, or even parents in college, might be able to combine the two credits.

To qualify for the full Hope or Lifetime Learning Credit, try to push your adjusted gross income below $45,000 if you are single or $90,000 if married. You can make use of the credit if you are single with an income up to $55,000, or married with an income up to $110,000, but you won't qualify for as much as if your income is lower.

Keep in mind that you might have some control over these figures because they are levels for tax purposes, not your actual compensation. Some simple methods to cut your taxable income would be to add money to a 401(k) or similar retirement fund at work or open a tax-deductible individual retirement account. You have until April 16 to fund the IRA, but 401(k) contributions must be completed by the end of the year.

When you contribute to a 401(k), you save money on your taxes that year, but the college tax credits help more.

"Anyone who is near the range where the credit is phased out, or who would otherwise receive a more generous education credit, should carefully review opportunities," said Joseph Hurley, a certified public accountant and chief executive of

Also make sure you don't do something that forces your income higher for tax purposes. For example, be careful about selling a stock or mutual fund that is worth more than when you purchased it, because you will owe capital gains taxes. (Selling investments that have been profitable also can reduce financial aid. Families that expect aid should avoid selling stocks, bonds and mutual funds during college. They should try to sell by Dec. 31 of their child's junior year in high school.)

For tax purposes, you can reduce, or eliminate, the impact of selling a profitable investment by selling another stock, bond or mutual fund that has lost value since you purchased it.

You can also secure a tax deduction if you are paying off student loans for yourself, spouse or child. Although it doesn't cut your tax bill directly, like a credit, that is potentially a deduction of $2,500 from your taxable income, depending on how much interest you have paid in a year and your income. And you can combine the deduction with the Hope and Lifetime Learning Credits.

The benefit is phased out when your modified adjusted gross income is between $50,000 and $65,000 for singles and $105,000 and $135,000 for married people.

If you have been paying for a child to attend college and are too affluent to deduct interest on loans, consider having your child use the deduction. Students can't take the deduction, however, if their parents are claiming the child as a dependent.

Hurley suggests examining tax calculations to see which way is most advantageous: getting the deduction for college interest or for claiming a child as a dependent.

For affluent families, he notes, parents may receive little advantage from claiming the child as a dependent. Yet a recent college graduate could get a large benefit from claiming education credits for the last year of college and the loan deductions.

Beyond trying to reduce your income to take advantage of college credits and student loan deductions, other strategies might maximize your tax advantages.

For example, you might want to delay, or speed up, when you will be paying tuition bills.

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