Many families with moderate to above average-incomes will qualify for tax credits and tax deductions when they spend money on tuition and fees for education. For instance, you can claim the $1,500 Hope tax credit if you’ve paid at least $2,000 for tuition and fees during your child’s first two years of college. For a full credit, your income on a joint return must be no more than $80,000.
Congress also doesn’t want you double-dipping tax benefits, though. Thus, if you were to pay the full tuition bill with tax-free money from a 529 plan, you’d have to make a choice.
In most cases, the Hope tax credit will be worth a lot more than the tax savings on 529 distribution, However, there’s a way to get both breaks. Pay at least $2,000 for tuition and fees from some other account, besides your 529 plan, and take the credit against that outlay. Other college costs can come from a 529 plan.