Junior may be able to take advantage of tax credits for education even if you can't.
If you earn a healthy income, then you probably don't qualify for the higher-education tax credits intended to help pay college-tuition bills. That's the bad news. The good news is your college-age child may be able to claim one of the credits instead.
Both the Hope Scholarship credit (maximum $1,500) 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 2004 both credits are phased out starting at an adjusted gross income, or AGI, of $85,000 for joint filers and $42,000 for singles. At AGI levels of $105,000 and $52,000, respectively, you're completely ineligible. As you might imagine, tons of parents fall into this category. But if even 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 for your child ($3,100 for the 2004 tax year). Then the 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 phased out between an AGI of $214,050 and $336,550 for joint filers and between $142,700 and $265,200 for single filers. (These are the 2004 figures; they're slightly higher for 2005). So giving up that dependency deduction on your 2004 tax return may actually cost you little, or even nothing at all.
On the other hand, if you're still fully eligible for the dependency exemption, you should probably claim it and pass on this strategy. That is, unless you really feel like giving your college kid a pretty nice gift this tax season.