Child Tax Credit

The child tax credit is $1,000 for each qualified child under the age of 17. However, this credit begins to phase out when modified adjusted gross income reaches $75,000 for singles and $110,000 for joint filers. This credit is reduced by $50 for each $1,000 or fraction thereof above the thresholds. Since this is a dollar for dollar reduction in income tax liability, this money could be used to fund a Coverdell Education Savings Account for that child.

Coverdell Education Savings Account

The Coverdell Education Savings Account allows an annual contribution of $2,000 per child. The contribution is not deductible but if the fund is used for qualified higher education expenses, the distribution is tax exempt. These expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible education institution. Room and board can also be included if certain conditions are met.

The child must be under 18 years of age to set up a Coverdell Education Savings Account and the contribution is phased out for single parents with modified AGI greater than $95,000 and joint filers greater than $190,000. When distributions are not used for education, the earnings are includable in income and could be subject to a 10% penalty. Also, the exclusion is not available for any year which a Hope or Lifetime Learning Credit (discussed below) is claimed.

American Opportunity Credit

The federal tax code allows an "American Oppertunity Credit" of $2,500 per student for the first four years of post-secondary education. The credit allows taxpayers a 100% credit for first $2,000 of qualified tuition and related expenses, including books, and a 25% credit for second $2,000 of qualified tuition and related expenses. This credit phases out for taxpayers with an adjusted gross income between $80,000-$90,000 for single filers, and between $160,000-$180,000 for joint filers.

Lifetime Learning Credit

The federal tax code allows a "Lifetime Learning Credit" of 20% of qualified tuition expenses for any year the American Opportunity Credit is not claimed. The 20% Lifetime Learning Credit is computed on the first $10,000 of tuition expense for any post-secondary education including courses to acquire or improve job skills. This credit phases out for taxpayers with an adjusted gross income between $50,000-$60,000 for single filers and $100,000-$200,000 for joint filers. The credit is allowed for tuition and fees required for enrollment or attendance only. It does not include books, supplies and equipment or room and board.

Education Assistance

Employer provided education assistance is excluded from employee's income. The excludable amount of tuition, fees, and related expenses is limited to $5,250 per individual per year. 

Education Loans

Individuals are allowed to deduct interest paid on qualified education loans. The interest is deducted in arriving at adjusted gross income and is allowed whether or not the taxpayer itemizes. The amount of interest that can be deducted is $2,500.

A qualified education loan is any debt incurred to pay qualified higher education expenses of the taxpayer, the taxpayer's spouse or an individual who was the taxpayer's dependent at the time that the debt was incurred.

The interest deduction is phased out starting at $60,000 of income for single taxpayers and starting at $120,000 for joint filers and is totally phased out once the income exceeds $75,000 or $150,000 respectively. 

U.S. Savings Bonds

Interest earned on the redemption of qualified U.S. Savings Bonds can be excluded from income if used to pay for higher education. Qualified U.S. Savings Bonds are any such bond issued after 1989 to an individual who is at least 24 years of age. Qualified higher education expenses include tuition and fees required for enrollment or attendance at an eligible education institution for either the taxpayer, the taxpayer's spouse or dependent of the taxpayer.

The exclusion from income starts to phase out at $69,950 for single filers and at $104,900 for joint filers. This phase out is adjusted for inflation annually.  

Education Deduction

An above-the-line deduction for tuition and related expenses is available. The deduction is $4,000 and is available for taxpayers with adjusted gross income below $130,000 for joint filers and $65,000 for other filers. This deduction must be coordinated with the other credits, but because of the higher income limitations, some taxpayers may be eligible for this deduction that could not take the credit.