Families that hope to send children to college, as well as those paying education expenses at the elementary and secondary levels, may benefit from the tax provisions outlined below.
Earnings on investments in Coverdell ESAs are not taxed, and withdrawals are federally tax free as long as they are used for qualified expenses associated with elementary, secondary, or college education. You may contribute $2,000 annually per child under the age of 18, unless the child is a special needs beneficiary. The contribution deadline is, as with traditional and Roth IRAs, your tax return due date, not including extensions. Single taxpayers with modified adjusted gross incomes of more than $110,000 and joint filers with incomes in excess of $220,000 are not eligible to contribute to Coverdell ESAs.
These college savings plans permit investors to accumulate aggregate amounts of up to $300,000 for higher education depending on the state in which the plan is established. Withdrawals used to finance qualified education expenses are federally tax free. There are no income thresholds and typically no annual contribution limits, although annual contributions of more than $12,000 ($24,000 when made jointly with a spouse) may require filing a federal gift tax form.
The tax benefits outlined below apply to families or individuals that are financing higher education or job training skills. Keep in mind that there are some restrictions. For example, the deduction for education tuition and fees cannot be used in conjunction with the Hope or Lifetime Learning credits in the same year.
| Tax Incentive | Amount of Credit or Deduction | Income Thresholds for Credit | Income Thresholds for Partial Credit |
| Hope Credit | Maximum credit in 2007 of $1,650 annually per student during the first two years of higher education | Single filers with MAGI* up to $47,000 in 2007; couples filing jointly with MAGI up to $94,000 in 2007 | Single filers with MAGI* between $47,000 and $57,000 in 2007; couples filing jointly with MAGI between $94,000 and $114,000 in 2007 |
| Lifetime Learning Credit | Maximum credit of $2,000** annually for 20% of the first $10,000 of qualifying tuition expense associated with higher education or training to enhance job skills; taxpayers may claim the credit for an unlimited number of years | Same as Hope Credit | Same as Hope Credit |
*MAGI is Modified Adjusted Gross Income.
**Please note: The credit may be higher for certain students attending a qualifying school in the Gulf Opportunity Zone.