Because the Hope credit is available only for a student's first two years, timing expenses may allow you to maximize the credit. In fact, you should be able to earn five years' worth of credit for a child who makes it through college in four years. How? Easy. You get one Hope credit for paying first semester freshman year tuition in the fall of 2006, for example. Paying second semester freshman tuition and first semester sophomore tuition in 2007 earns a second Hope credit on your 2007 tax return. Second semester sophomore tuition and first junior tuition count toward a Lifetime Learning credit. Second semester junior tuition and first semester senior tuition do, too. That's four credits. The key to getting the fifth is not to pay second semester senior tuition until after the first of the year—in 2010 in this example. That way, you earn the fifth credit. If you pay the full fourth-year bill at the beginning of senior year, you'd lose one year's worth of the credit.
The Hope credit and lifetime learning credit are available to the parents of a student if the parents claim the student as a dependent. The credits are available to the student if he/she is not claimed as a dependent. If the income of the parents is high enough so that the parents do not qualify for the credits, the parents may want to consider (1) not claiming the child as a dependent. Skipping the dependency exemption means the child, whose income is likely to be low enough to qualify for a credit, can then take the credit — even if the parents pay the tuition. (Of course, the student must have some tax liability for the credit to have any value.) Note that if the parents qualify to claim the child as a dependent but choose not to, the student may NOT claim a personal exemption. In many cases, though, the value of the education credit will outweigh the lost value of the exemption.
If you have several children, you can take advantage of the fact that the education savings account rules allow you to roll unused portions of one child's education savings account over to another child's.
The deadline for contributing to an education savings account is the due date of the return for the year in question. Thus, you'll have until April 15, 2007 to make 2006 contributions. However, the sooner you make the deposit, the sooner the money starts earning tax-free dollars. In the past, paying expenses with education savings account funds prevented parents from claiming the Hope or Lifetime Learning credit for expenses paid for the same child. That restriction has disappeared, however, so you may pay expenses with tax-free ESA earnings AND claim one of the credits—as long as the tax-free ESA money isn't used to pay the expenses for which the credit is claimed.