Give Your College Kid a Tax Break

Both the Hope Scholarship credit (maximum $1,650 for 2007) and the Lifetime Learning credit (maximum $2,000) help soften the cost of postsecondary education. The Hope credit is available only for the first two years of college, while the Lifetime Learning credit can be used at any time and doesn't have a degree or workload requirement.

Unfortunately, you can't take both credits for the same student in the same year, and many parents earn too much to be eligible for either one. That's because in tax year 2007 both credits are phased out starting at an adjusted gross income, or AGI, of $94,000 for joint filers and $47,000 for singles. At AGI levels of $114,000 and $57,000, respectively, you're completely ineligible. As you might imagine, tons of parents fall into this category. But even if you're among them, these valuable credits may not have to go to waste after all.

Here's how: Arrange things so your college-age child can claim one of these credits instead of you. To implement this strategy, you must forgo the dependency exemption deduction for your child ($3,400 for the 2007 tax year). Then the education tax credit becomes the property of your child, whose income is presumably well below the phase-out range.

The now-liberated education credit can cut your college-age child's tax bill by quite a bit. Remember, however, the credit is worthless to your child unless he or she has enough taxable income to actually owe the IRS. This income could be from summer jobs, work-study at school or income and gains from investments held in your child's name.

Also, keep in mind that this strategy makes the most sense when your AGI is quite high. Why? Because your dependency write-off for your college kid is itself partially phased out between an AGI of $234,600 and $357,100 for joint filers and between $195,500 and $318,000 for heads of households. So giving up that dependency deduction on your 2007 tax return may not cost you much. (This strategy does not permit your child to claim an exemption on his or her return; the exemption belongs to you whether you're able to use it or not.)