Many parents and grandparents are aware of the benefits of 529 college savings plans. Earnings in these plans grow tax-free, and withdrawals aren't taxed either if the money is spent on higher education for the account's beneficiary. In addition, many states offer benefits for contributions to a 529 plan, such as matching grants, as well as state income tax deductions. However, the tax code offers several other benefits to help make it easier to pay college costs. They include the following: Coverdell Education Savings Accounts Like 529 plans, these vehicles offer investment income and withdrawals for education expenses free of taxation. The catch, though, is that contributions are limited to $2,000 per year per student, and the student must be under age 18 when the account is opened. With 529 plans, contributions can't exceed the dollar amount needed to pay for the beneficiary's education, but just about all 529 plan limits exceed $250,000. Nevertheless, Coverdell ESAs offer some significant advantages. For one, these plans are offered by a number of financial firms and institutions. Once you set up an account, you may have a broad range of investments from which to choose. If you're an experienced investor you can direct Coverdell contributions where you'd like, into low-cost mutual funds, for example, or into investments with exceptional upside potential. With 529 plans, which are professionally managed, you have less control. Moreover, 529 plans limit tax-free withdrawals to post-high school expenses. With a Coverdell you can tap the account for K-12 costs as well as college bills, tax-free. You might use a Coverdell to pay for private school or for academic tutoring, for example. The Tax Relief Act of 2010 extends the tax provisions of Coverdell ESAs through tax year 2012. A married couple's income cannot exceed $190,000 to make the full $2,000 Coverdell contribution; for single taxpayers, the income limit is $95,000. If that's a problem, you can give the money to someone with a qualifying income–perhaps a retired grandparent–who can make the $2,000 contribution for you. Income Shifting If you are self-employed, a professional, or a business owner, you may be able to shift income from your high tax bracket to a child who'll owe no or low taxes. The savings on your tax bill can then go toward a college fund. Suppose, for example, Dr. Alice Duncan, a self-employed physician, hires her teenage daughter Kim to work weekends and school holidays to maintain her office's IT system and help with billing and other tasks. Over the course of a year, Kim works 500 hours and receives $15 an hour, which is the going rate for such work in their town. (Continued on next page) With the proper paperwork supporting that she paid Kim a fair wage for work actually performed, Dr. Duncan can deduct her daughter's wages, $7,500, on her taxes. Assuming she's in a 35% tax bracket, she saves $2,625 in income tax. Kim, meanwhile, offsets her $7,500 in earned income with the $5,800 standard deduction, leaving only $1,700 in taxable income. Since Kim is in a 10% tax bracket, she owes $170 in taxes and the family saves nearly $2,500–which can be put in a fund for future college costs. Cedric M. Bright, a physician in Durham, North Carolina, says that employing a child might be a great idea to help cope with rising college costs. Dr. Bright and his wife, Maria, have a 4-year-old son, Andrew. When Andrew enters college 14 years from now, they can expect to pay about $260,000 for a four-year private college education. "We expect him to go to college,†says Dr. Bright, "and the costs then might be twice what they are today. It might be the case that a bright youngster will be able to do valuable work for a parent.†Putting a youngster on the payroll may force parents to pay Social Security, Medicare, and unemployment taxes, reducing the ultimate tax benefit, if their business is structured as an S or C corporation. However, says Genevia Gee Fulbright, a CPA in Durham, "some parents may get tax breaks if they run sole proprietorships or partnerships in which each partner is a parent of the child. If they employ their dependent children under age 18, those wages are not subject to Social Security, Medicare, or federal and in some instances state unemployment taxes.†Tax Credits Both the American Opportunity and Lifetime Learning credits are available through 2012 to offset college costs. You can't use both for the same child, though. Of the two, the American Opportunity tax credit offers the better deal, tax savings of up to $2,500 per student. To save $2,500, you must spend at least $4,000 on tuition, fees, books, supplies, and equipment. Other conditions apply. To take advantage of the American Opportunity tax credit, you must pay expenses for a student in the first four years of post-high school education who is pursuing an undergraduate degree and going to school at least half time. To get the full $2,500 tax credit, your income cannot exceed $80,000 for single taxpayers or $160,000 for those who file joint returns. The credit phases out with incomes up to $90,000 (single) or $180,000 (joint). "For those who qualify,†says Fulbright, "the American Opportunity tax credit is up to 40% refundable.†Thus, if you claim a tax credit of up to $2,500 and the credit is greater than your tax liability (even if your liability is zero), the difference is refundable to you, up to 40% of the credit you're claiming, which is $1,000 if you claim the full $2,500.