Take Advantage of Education Tax Breaks
The American Opportunity tax credit can help offset the cost of college tuition.

My son will be starting college this fall, and we’ll be paying his first tuition bill this summer. We have money in his 529 plan and will need to use some cash from our regular bank account, too. Which account should we withdraw from first?
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Before you tap the 529 account for this semester’s tuition bill, see whether you can take advantage of the American Opportunity tax credit, which provides a tax credit of up to $2,500 each year for eligible college costs. You can’t double-dip on tax breaks -- that is, use a tax-free distribution from a 529 or Coverdell education saving account to cover the same expenses for which you claim the tax credit -- so you may not be able to qualify for the credit if you pay all of the bills from the 529.

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To qualify for the American Opportunity tax credit, your adjusted gross income must be less than $90,000 if you are single, or $180,000 if you’re married filing jointly (the size of the credit starts to phase out at $80,000 for singles and $160,000 for couples filing jointly). Money you spend on tuition, fees and books in the first four years of college can count toward the credit.
The credit is worth 100% of the first $2,000 you pay for eligible expenses, plus 25% of the next $2,000 of eligible expenses. So, you could pay at least $4,000 of the tuition bill from your bank account, then use the 529 for any remaining portion of the tuition bill, plus room and board (room and board qualifies for 529 money but not for the American Opportunity credit). For details, see IRS Publication 970 Tax Benefits for Education. Also see my column about Tax Breaks and Credits for College Costs.
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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
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