• Parents should pay.Arguments in favor of shelling out your hard-earned cash for a son’s or daughter’s higher education can be compelling. For one thing, college is a very expensive proposition these days. A year of undergraduate study at a private university can easily top $30,000 and public in-state schools can run over $12,000. Of course, if your student decides to get an advanced degree or go to medical or law school, he or she can run up a bill exceeding the cost of your home mortgage. Advocates of this point of view ask, “Do you really want to saddle your kid with that kind of debt so early in life?”They add that if your child ends up working to pay for college, that’s less time available for study and making friends. And, of course, friendships built in college (“social networking” in today’s parlance) can generate a wealth of opportunities for a future career. Also, by investing in tax-deferred 529 plans, parents can withdraw funds free from federal income taxes when it’s time for college.

• The child should take the responsibility.Others argue that covering the cost of your child’s college education should not be a priority. After all, they reason, your kid has a lifetime to pay back student loans, and making loan payments can generate a positive credit history. Advocates of this position also argue that kids who have to pay for their own tuition, books, and living expenses learn responsibility and value the investment that college represents. They may also point to tuition reimbursement plans provided by some companies or the military service option as a way to get a college education without breaking the bank.Folks on this side of the debate often argue that 529 plans are overrated as a savings vehicle because investment options can be limited and tax rules are likely to change, undermining future tax benefits. Finally, they reason that a person’s own retirement should take precedence over saving for a child’s education. “You can’t take out a loan for retirement,” they argue.

• Making the decision.Of course, your family’s dynamics, the importance you place on a college education, and your personal financial priorities will factor into this decision. If you’d like help looking at the pros and cons of this important issue, give us a call.

 

So what education credits can you claim on your 2010 federal income tax return? The Hope Scholarship/American Opportunity Credit and the Lifetime Learning Credit are available this year, and, as you may already know, have many similarities.

For instance, to be eligible for these credits, the qualified out-of-pocket education expenses you pay in 2010 must be for academic periods that begin this year or in the first three months of 2011. Tuition and fees are qualified education expenses for purposes of claiming the credits, while room and board are not.

How do the credits differ? One difference is the maximum available amount. Generally, you can claim up to $2,500 per eligible student when you qualify for the Hope Scholarship/American Opportunity Credit, while the most you can claim for the Lifetime Learning Credit is $2,000.

Another difference is the adjusted gross income level at which the credits begin to shrink. For 2010, the phase-out for the Hope Scholarship/American Opportunity Credit starts at $80,000 when you’re single ($160,000 for married filing jointly). For the Lifetime Learning Credit, the phase-out begins at $50,000 for singles ($100,000 when you’re married filing jointly).

Call for more information. We have a complete list of education tax benefits, including qualified savings bond interest, student loan deductions, and withdrawals from IRAs and college savings plans.