Written by: Jason Woolcock Most people are aware of the fact that the average price of college is continuing to rise more rapidly than inflation. However, they may not be aware of savings plans, tax deductions and tax credits available to assist with the expense of higher education. Section 529 plans have become a popular way to save for college education. The earnings on a 529 plan are not taxable and accumulate tax free in the 529 plan. Future distributions are tax free as long as they are used to pay qualified higher education expenses for a designated beneficiary. This could result in tax savings and more available funds when comparing to other investments that generate taxable interest, dividends or capital gains. Generally, mortgage interest paid is deductible on your tax return and other interest payments are not. However, interest paid during the year on a qualified student loan may be deductible. For 2011, a deduction is allowed if the taxpayer's modified adjusted gross income is below $75,000 for a single taxpayer ($150,000 if married filing a joint return). There are currently two federal tax credits available to offset the costs of higher education. These are the American Opportunity Credit and the Lifetime Learning Credit. To qualify for either credit, you must pay education costs for yourself, your spouse or dependent with non scholarship or non Section 529 plan funds. For each student, you can choose to claim only one of the credits in a single tax year. However, you can choose the credit per student and per year to provide the best tax advantage. Here are some of the highlights of these credits: American Opportunity Credit Maximum credit of $2,500 per eligible student Available for the first four years of post-secondary education Can maximize credit with $4,000 of qualified tuition and related expenses Student must be pursuing an undergraduate degree Credit begins to phase out when income is above $80,000 ($160,000 for a joint return) $1,000 of credit is not limited to tax and can be received even if no taxes are owed Lifetime Learning Credit Maximum credit of $2,000 per eligible student Available for all years of post-secondary education and for other courses Can maximize credit with $10,000 of qualified tuition and related expenses Student does not need to be pursuing a degree Credit begins to phase out when income is above $60,000 ($120,000 for a joint return) Credit is limited to tax balance The following questions may arise for a taxpayer when evaluating the current education credits: I have the option of paying for the spring tuition in the current tax year or making the payment in the next tax year, what should be done to maximize the overall tax credits? How much tuition should I pay with Section 529 plan funds and how much should I pay with other funds and still maximize the tax credits currently available? If I am over the income limits to receive the credits, can my dependent claim a tax credit? I believe that I qualify for an education credit, but which one would be most beneficial? At O'Polka & Company, we strive to create the best possible tax outcome for our clients. If you are planning for educational costs we want to make sure that you take advantage of the options available. If you would like additional information or assistance please feel free to contact us.