Higher education comes with a higher and higher cost. Take advantage of tax breaks to ease the financial pain. Thinkstock By the editors of Kiplinger's Personal Finance Updated January 2015 The big day has finally arrived. Your son or daughter applied to colleges, sifted through the acceptances, and decided where to spend the next four (or five or more) years. Now all you have to do is figure out how to pay for it. Luckily, Uncle Sam offers several ways to ease the sting of rising tuition costs. Which tax breaks work for you will depend on your income, your child's student status and the source of your education funding.See Also: Tax Planning for Life's Major Events American Opportunity Credit This credit is available for expenses incurred by students who attend college at least half-time during their first four years of undergraduate education. It replaces— and improves upon — the Hope credit, which was available for only the first two years of higher education. (A tax credit is a dollar-for-dollar reduction of your tax liability.) A parent, spouse or student who is not claimed as a dependent can take a federal income-tax credit equal to 100% of the first $2,000 spent on qualified education expenses — tuition, fees and textbooks — and 25% of the next $2,000, for a total credit of $2,500 for each qualifying student. If the credit more than wipes out your tax liability for the year, you'll get a refund check from the IRS for up to $1,000 for each qualifying student. Married couples filing jointly qualify for the full credit with a modified adjusted gross income of $160,000 or less, and single filers qualify with an income of $80,000 or less. The credit phases out completely at $180,000 for married couples and $90,000 for single filers. Lifetime Learning With this credit, you can claim 20% of your of up to $10,000 of out-of-pocket costs for tuition, fees and books, for a maximum credit of $2,000 a year. Unlike the American Opportunity credit, this credit is not limited to undergraduate educational expenses, nor does the credit apply only to students attending at least half-time. You can claim the credit for yourself, your spouse or your dependent up to $2,000 per family each year. Advertisement Your right to the credit begins to phase out if your 2014 modified adjusted gross income exceeds $108,000 on a joint return or $54,000 on an individual return. Dependency Rules If you earn too much to claim an education credit and your student has some income of his or her own, it might pay off to forgo the dependency exemption and let your student file his or her own tax return and claim the credit. You have to do the math to see if the loss of the exemption costs you more or less than the credit is worth to the child. And, note that if you waive the exemption, your child can not claim it on his or her return. No one gets it. Tapping Tax-Free College Savings You can take tax-free distributions for qualified education expenses from your child's 529 college savings plan or Coverdell Education Savings Account. You can use tax-free withdrawals from Coverdell ESAs and 529 college savings plans in the same year as the Hope or Lifetime Learning credits as long as you don't use them for the same expenses. (See 529 Plan FAQs) Tax-Free Savings Bond Interest Interest earned on EE or I savings bonds issued after 1989 is tax free if the bond is used for college tuition and fee. For 2014, the tax break starts to phase out at a modified adjusted gross income of $113,950 for married taxpayers filing jointly and at $76,000 for single filers. The break disappears completely when adjusted gross income is $143,950 for couples filing jointly and $91,100 for single filers. The tax-free provision cannot be combined with other educational tax breaks so, for example, expenses paid with tax-free interest don't count when figuring the American Opportunity or Lifetime Learning credit.