(Article by Mary Dalrymple from MSNBC.com, 6 December 2006)

Many parents earn a failing grade in College Taxes 101

Send a child to college and you'll end up with your fair share of homework trying to figure out how to pay for it. It's not an easy subject, even if you aced math in high school. It seems many parents aren't passing their college benefits courses, especially when it comes to education tax breaks.

As part of a Senate hearing into the skyrocketing cost of college, the Government Accountability Office reported that parents make "suboptimal" use of college tax breaks. More bluntly, about 1 in 4 earned a failing grade.

The office did a study of 2002 tax returns and found that 27% of people who could have taken advantage of an educational tax break to recoup some of their college costs failed to use any of them. That's 374,000 families who could have cut their taxes by an average of $169. About 10% of the group could have cut their taxes by more than $500.

Worse? Half of these returns were prepared by paid tax professionals.

The problem, for parents and tax preparers, stems not from the I.Q. of these students but from the complexity of the material. Education tax breaks are so complicated that the Internal Revenue Service publication describing them all is 82 pages long. (You will get extra credit if you actually read the publication.)

College costs have done nothing but rise since 2002, so the potential for tax savings has probably grown since then.

To take optimal advantage of the available educational tax breaks, you'll need to become schooled in their details. That means learning which education expenses qualify for various tax reductions. You'll have to figure out how each tax break is structured and whether you or your favorite college student qualifies. You'll also have to learn about how the breaks interact with each other and education savings accounts.

Your educational tax benefits curriculum includes:

• Lifetime Learning Credit: This credit permits a family to claim a credit worth 20% of tuition and fees, up to $2,000 on each tax return. It starts to fade out and disappear for individuals who earn $45,000 or more and married couples who earn $90,000 or more.
• Hope Credit: This benefit applies to taxpayers within the same income bounds as the Lifetime Learning Credit. It's worth up to $1,650 in each of a student's first two years of college.
• Tuition and Fees Deduction: This tax goodie allows taxpayers who earn up to $65,000 (or $130,000 for a married couple) to take an educational deduction worth up to $4,000. Families with higher incomes (up to $80,000 for an individual or $160,000 for a couple) may qualify for a deduction worth up to $2,000.

Now, for the complications. First, the tuition and fees deduction doesn't actually exist right now. It's one of many tax breaks that routinely expires and is then routinely extended by Congress ... when they get around to it. This being a less-than-routine year in Congress, they haven't quite gotten around to it. They're pressing right up against the deadline, just like college students cramming for final exams.

Second, these benefits work in different ways. A credit reduces your taxes dollar-for-dollar, while a deduction reduces the amount of your income that's subject to tax. Often a credit is a better tax deal than a deduction but not always. It will depend on the rest of your tax situation.

Third, you can claim only one credit or deduction for a student in a given year, even if it looks like more than one would apply. Yes, you have to pick just one. If you have more than one student in school at the same time, you'll have to look even more closely. The limits on the Lifetime Learning Credit apply to the entire tax return, even if there's more than one student in the house. That's not true of Hope Credit.

Lastly, if you've saved for your children's college education through a tax-advantaged savings account, you may not qualify for any of these perks.

You can see why parents and tax professionals might be confused. Unfortunately, there are no easy answers. If you have a child heading to college soon, it's worth the time to learn about each credit and deduction and run some numbers.

Try testing different scenarios using the myriad 1040 tax calculators available on the Internet. There's one here, for example. Talk to a trusted tax professional, but keep in mind that their track record is just as bad as everyone else's. Your tax preparation software may also compute the optimal use of education tax benefits.

Go at the question a number of ways. If all your sources agree, you're probably headed down the right track. If they all give you a different answer, it's time to hit the books again. Visit the College Savings Center to help you brush up on the subject.