Uncle Sam will help pay for college

Transferring credits to pare the cost of a top-drawer college degree isn't the only hope for tuition-shocked students and their families. Tax breaks can help ease the pain:

Tax deductions for higher-education costs. Because of a last-minute extension in 2006, you can still deduct some of your higher-education costs.

For 2007, taxpayers with a modified adjusted gross income of less than $65,000 ($130,000 for married taxpayers filing joint returns) can deduct a maximum of $4,000.

Taxpayers with an adjusted gross income between $65,001 and $80,000 (or $130,001 and $160,000 if married filing jointly) are entitled to a maximum deduction of $2,000. Taxpayers with higher incomes don't get a deduction.

A word of warning: You can't take these deductions and then claim either the Hope Credit (worth $1,650 a year for the first two years of college only) or Lifetime Learning Credit (worth $2,000 a year) for the same student in the same year. So check with a tax adviser to figure out which of these tax breaks works best for you.

Tax-free withdrawals from 529 savings plans. These state-sponsored investment accounts allow parents and grandparents to invest as much as $300,000 per student. The withdrawals are tax-free if you use them for qualified college expenses -- including room and board, which isn't true of prepaid tuition plans. See "How Uncle Sam wants you to save for college" for more.

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Coverdell Education Savings Account. You can contribute $2,000 a year in what used to be known as the Education IRA. The contribution isn't deductible, but it grows tax-free. Taxpayers can claim income of up to $110,000 ($220,000 married filing jointly) and still qualify for the breaks.

The money can be used for secondary or primary education as well as college. However, the K-12 provision is scheduled to sunset in 2010, with the contribution limit dropping back to $500, so you'll want to focus on 529 plans.

• Video: Are you being punished for saving for college?

For non-tax-related ways Uncle Sam is planning to help you pay for college, see "College students get a break on costs."

Updated Jan. 8, 2008

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