Yes, you can deduct college tuition costs

If you're paying interest on student loans, be happy. You may still deduct up to $2,500 of the interest charges on your 2006 and 2007 returns.

And, after lots of gnashing of teeth and politicking, another big tax break is available to families of college students: the deduction for qualified college expenses.

The deduction for college expenses expired after 2005, but the tax break proved popular for families that could not qualify for either the Hope Credit or the Lifetime Learning Credit.

So, just before Congress adjourned in early December, the deduction was renewed in a bill that contained a grab bag of tax breaks.

How the interest deduction works

Up to $2,500 in student loan interest paid in 2006 can be deducted on 2006 returns. This is unchanged from 2005.

You can claim the deduction indefinitely.

The deduction can be claimed regardless of whether you itemize your deductions on Schedule A.

As on 2005 returns, if you’re married filing jointly, you can deduct all $2,500 if your adjusted gross income (AGI) is $100,000 or less. It phases out between $100,000 and $130,000.

For other filers, you get the full deduction if you earn $50,000 or less. The deduction phases out between $50,000 and $65,000.

Deducting qualified expenses

You can deduct up to $4,000 in qualified expenses in 2006 and in 2007. This is the same as in 2006. You can qualify for the deduction if your AGI is $130,000 or less (for couples filing jointly) or under $65,000 for singles.

If your AGI is between $65,000 and $80,000 for singles or $130,000 to $160,000 for married couples, the deduction drops to $2,000. You can not claim the deduction if your AGI is greater than $80,000 for singles or $160,000 for married couples filing jointly.

Don't try to use the Hope or Lifetime credits, too

Sorry, but you can NOT claim both this deduction and the Hope and Lifetime Learning credits for one student in the same year.

• For more information, see IRS Publication 970.