Education Saving, Expenses and Tax Implication

• Coverdell Education Savings Accounts [ESA] are trust or custodial accounts designed solely for the purpose of paying the trust beneficiary's qualifying education expenses.

• Series EE and series I bonds interest tax free, if you pay qualified educational expenses.

• Education Credits: Taxpayers can take advantage of two comparable tax credits to help defray part of the costs of higher education. They are known as the American opportunity credit—formerly the "Hope" credit—and the lifetime learning credit, and they are similar in some ways and dissimilar in others.

• Scholarships, fellowships, need-based education grants, eligible tuition reductions, as well as student loan cancellations and repayment aid, are all possible tax-free options for taxpayers.

• Taxable or tax-free tuition reductions are possible. A tax-free tuition decrease is referred to as a qualifying tuition reduction. If a tuition reduction is taxable, the taxpayer is viewed as receiving a payment in the amount of the tuition reduction and paying it to the educational institution on the student's behalf.

• Taxpayers can take a special deduction of up to $2,500 for interest paid on student loans used to pay for higher education costs. The interest on student loans is deducted as an adjustment to income, thus the deduction is available regardless of whether the person itemizes deductions.