How to Save Money on Your Kid's Tuition

Do Some Party Planning

So you have three options. You need to pick the Hope or Lifetime Learning credit or the tuition and fees deduction. Only one perk per student, reminds Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal for tax professionals.

Unfortunately, you have to understand arcane tax rules to make some sound decisions. Here's the big issue: The Hope and the Lifetime Learning credits are negated from your total tax bill. The tuition and fees deduction reduces your adjusted gross income. So there are different planning issues here.

In many instances you'll be better off just taking a credit, if you qualify, and reducing your total tax bill. But run the numbers first. You could get more benefit from other credits by taking the tuition and fees deduction and reducing your AGI. Here's an example.

Let's say your AGI is $112,000. At $110,000 your child tax credit starts to diminish. So if you can lower your AGI with the tuition and fees deduction, you'll then qualify for the full child tax credit and still get to deduct up to $4,000 of tuition expenses -- a double bonus.

It's really important to try different scenarios, especially if there are multiple students in the house. H&R Block's Web site has an Education Tax Benefits Estimator that can help you decide whether the credits or the deductions will work best.