Tax Smart Ways to Pay for College

Most families save for college in a variety of places—such as a 529 plan, a Coverdell education savings account, a custodial account, and their own savings. Deciding which accounts to tap first can make a big difference in their tax benefits.

You can use money from a 529 or Coverdell tax-free for college, but paying the full bill from those accounts could prevent you from claiming the Hope credit, because you can’t double dip on tax benefits.

Joint filers can qualify for this tax credit if they earn less than $114,000 in 2007, or $57,000 for single filers. The Hope credit can reduce your tax bill by up to $1,650 per child in each of the first two years of college. But you can claim the full credit only if you pay at least $2,200 of the college bills from an account other than a 529 or Coverdell.