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Little Known Tax Credits Can Ease the Burden of College Costs

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There are a number of ways to chip away at that enormous college bill, but there are some tax credits and deductions that can be a big help. NY1's Tara Lynn Wagner filed the following report.

You may not have a rich uncle eager to foot the bill for your college education, but many students and parents do have an Uncle Sam who's willing to lend a hand.

For one thing, there's the American Opportunity Tax Credit, which offers a maximum tax credit of $2500 per college student, per year, depending on your household income.

"Because there are phaseouts when your income rises to a certain level, you would not be able to take the credit, so sometimes it's beneficial if the student has income and they are not claimed as a dependent on the parents return, for them to take the credit," says UHY Advisors Tax Principal Eric Hananel.

Even better, the credit is refundable, meaning if the person claiming it actually owes less in taxes than the credit is worth, they can get what's leftover handed back to them -- up to a thousand bucks.

The other credit is the Lifetime Learning Credit worth up to $2000 per tax return -- not per student. This one is also good for continuing education and professional development courses, but remember with credits, it's one or the other.

"You can not double dip," Hananel says.

There are also a variety of deductions that can help reduce your tax bill, like the interest you pay on your student loan.

"The maximum deduction is $2500. It can be taken by the student if it's the student's obligation is or the parent could take the deduction if they took out the loan while the student was a dependent of theirs."

You can also deduct some of what you pay in tuition and fees as well as the costs of work-related education expenses—meaning classes or training that's required by your employer or relates to your current field.

Finally you can avoid paying taxes in the first place by investing in either a 529 Plan or Coverdell Education Savings Account. Yes, you're investing after-tax dollars, but Hananel says there is still a real benefit.

"It allows the income to grow tax free and when you start to withdraw the money, both the principal as well as the interest is not subject to income tax," Hananel says.

As long as it's being used for a qualified education expense like tuition, room and board, even a computer.

"If you take the money out and you don't use it to pay qualified expenses then the income is going to be subject to tax," says Hananel.

Plus a 10 percent penalty.

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