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Tax-Savvy Ways to Get Your Kids Through College

Of course there is a "modified" AGI phaseout range: $95,000 to $110,000 for singles or separate filers and $190,000 to 220,000 for married couples filing a joint return.

You can claim an American Opportunity or Lifetime Learning credit for a student in the same year he or she takes a tax-free distribution from a Coverdell, as long as the same expenses are not used for both benefits.

And you can use US Series EE or Series I Savings Bonds to save for college. The interest on bonds may be tax free when the bonds are redeemed to pay qualified higher education expenses.

According to, there are seven rules for qualifying for the exclusion of bond interest:
  • Qualified higher education expenses must be incurred during the same tax year in which the bonds are redeemed;
  • You must be at least 24 years old on the first day of the month in which you bought the bonds.
  • When using bonds for your child's education, the bonds must be registered in your name and/or your spouse's name. Your child can be listed as a beneficiary on the bond, but not as an owner or co-owner.
  • When using bonds for your own education, the bonds must be registered in your name.
  • If you are married, you must file a joint return to qualify for the exclusion.
  • You must meet certain income requirements (see below).
  • Your post-secondary institution must qualify for the program by being a college, university or vocational school that meets the standard for federal assistance (such as guaranteed student loan programs).

The costs of books or room and board are not considered qualified education expenses for purposes of excluding savings bond interest, but contributions to a 529 Plan do qualify.

You must use the principal and interest from the bonds to pay qualified expenses to exclude the interest from your gross income. If the amount of eligible bonds you've cashed during the year exceeds the amount of qualified educational expenses paid during the year, the amount of excluded interest is reduced.

For 2012, the exclusion phaseout range begins to be reduced to $72,850 to $87,850 for single filers and $109,250 to $139,250 for married couples. Married couples must file jointly to be eligible for the exclusion.

With all of the above methods of saving for education, the amount of educational expenses used to determine the exclusion is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance and other forms of tuition reduction.
Robert Flach has more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro .
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