There are several approaches to saving and spending for college education. You have to choose between the options as you can't claim multiple credits/deductions for the same expense. The right approach for you will depend on your current and future expected income level as well as your overall financial goals. These approaches include:
529 Plans - 529 Plans give parents and other family members a tax-advantaged way to save money for college expenses. While contributions are not tax deductible, the money grows tax-deferred and distributions are tax-free if used for qualifying higher education expenses. Qualifying education expenses include tuition, room and board, books, supplies, and most recently, computers and related peripheral equipment and software. The 529 Plan is also valuable as a vehicle for gifts from family members, especially grandparents.
Education Tuition Deduction - in 2009, you can claim a deduction - up to $2,000 or $4,000 - as an adjustment to gross income for expenses (tuition, fees and books) that you paid for higher education at an eligible educational institution. The deduction applies to you, your spouse and any dependents who you claimed as an exemption (subject phase-out for higher income levels).
American Opportunity Tax Credit - the American Opportunity Tax Credit replaces the Hope Scholarship Credit. It is available for the first four years of college or other postsecondary school that leads to a recognized educational credential. It does not apply to graduate-level courses. The maximum credit has increased to $2,500 per student for each year and 40% of the credit is refundable, which means you can receive up to $1,000 even if you owe no taxes. Qualified tuition and related expenses are now expanded to include books, supplies and equipment needed for a course of study even if the materials are not purchased from the educational institution as a condition of enrollment or attendance (subject phase-out for higher income levels).
Lifetime Learning Credit - the Lifetime Learning Credit provides a credit of 20% of education expenses up to a $2,000 credit per year per return. The Lifetime Learning Credit can be used for anyone taking undergraduate, graduate and professional degree courses, and it can be claimed for every year that you qualify to receive it. Courses need to be toward a recognized educational credential (subject phase-out for higher income levels).
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