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Uncle Sam helps parents and students to offset college expenses with federal tax laws which offer tax deductions, tax credits and incentives to invest money specifically for college.

Credits are the best, since they mean direct reductions of your income tax bill. All of the credits have some sort of income phase-out limit so you get less tax help as your income rises. These tax laws are:

The American Opportunity Tax Credit (AOTC) which was to expire at the end of 2012, was extended through December 2017 by the American Taxpayer Relief Act of 2012. As a modification of the Hope Credit, the AOTC makes education tax credits available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. In addition to tuition paid it also adds required course materials, such as books and supplies, to the list of qualifying expenses and allows the credit to be claimed for four postsecondary years instead of two.

Under the AOTC a taxpayer will be able to reduce his/her tax liability one dollar for each dollar of eligible credit. If the amount of the American Opportunity Tax Credit for which the taxpayer is eligible is more than the tax liability, the balance of the credit is refundable, up to a maximum refund of 40 percent of the amount of the credit for which the taxpayer is eligible. The maximum annual credit will be $2,500 per student. Income limits apply to receive the full credit.

Lifetime Learning Credit is for families of students in junior and senior year, or graduate school (as well as adults returning to school). It allows a tuition tax credit, equal to 20 percent of the first $10,000 paid in tuition and fees, or $2,000. Benefits are phased out for individuals with adjusted gross income (AGI) of more than $60,000 for single filers and for joint filers with AGI of more than $120,000.

Educational IRA (now known as the Coverdell Education Savings Account). Contributions can be made yearly to these Savings Accounts along with any gains from their investments and used to pay for college for a designated beneficiary. Contributions aren’t tax-deductible, but the earnings are tax-free.

Currently, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. This includes contributions (other than rollovers) to all the beneficiary’s Coverdell ESAs from all sources.

Student Loan Interest Deduction. You can deduct up to $2,500 yearly in interest actually paid on student loans. This benefit comes in the form of an adjustment to income, meaning you do not need to itemize on your tax return in order to be eligible.

If you claim one of these tax breaks in a tax year, you generally can’t claim the other. But if you have two children in college, you could claim the AOTC for one and the Lifetime for the other, if they qualify.

It is recommended that you check with your tax professional for more information on credits and deductions in order to realize the fullest possible savings.

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