March 21 (Bloomberg) -- Many college funding strategies go against the grain of conventional tax planning because the tax moves may impair financial aid prospects.

Income and assets in a child's name, for example, can curtail chances for aid. Yet there are a number of tax breaks and suggestions that can lower your tax bill while making college more affordable.

Brian Greenberg, a Marlton, New Jersey-based certified college planning specialist and certified public accountant, said the ``tuition time bomb'' for his daughter came when she was in eighth grade. It compelled him to see college financing in a different light.

``Good tax planning can often result in poor college planning,'' Greenberg has found. ``Many CPAs recommend shifting assets into a child's name for the lower tax rate, but that may hurt their chances for financial aid.''

Greenberg says some of the first questions to ask have nothing to do with taxes or how much money you have to spend on college. They include what school your child is likely to go to and your prospect of receiving aid.

``Eligibility for aid is a function of where one attends college,'' says Greenberg. ``Income over $75,000 may exclude many from inexpensive state schools, over $125,000 may exclude you from mid-range private colleges and over $200,000 from anywhere.''

Aid Available

Apply for aid no matter what your financial circumstances because colleges offer merit scholarships that aren't tied to financial need. Look for colleges that favor grants over loans. Grants don't have to be paid back and may be more generously awarded at private institutions with large endowments.

``It may cost less to go to Columbia or Harvard universities than smaller private colleges because their endowments are larger,'' Greenberg says. ``Parents need to be prudent shoppers when it comes to schools.''

If your chances for aid are good, who owns the assets for college can make the difference in aid and taxes.

Greenberg says he had one client who was a single mother whose son earned $5,000 for college. As the child of a single parent, he should have qualified for a generous aid package. Because his earnings were in his name, he paid a penalty. Under federal guidelines, aid is reduced by 50 cents on the dollar for student income and 35 cents for student assets.

Assets in Parents' Names

For assets in parents' names, aid is cut only 5.6 percent. A student's income is ``taxed'' for financial aid when it's above $2,400.

``The effective tax rate (including payroll taxes on the money he earned) was 69 percent for this young man,'' said Greenberg. ``His hard work and good graces turned out sourly for him.''

That's why it's almost always better to place college assets in parents' or grandparents' names if you will qualify for aid. Just keep in mind that aid formulas can be complicated. ``One can earn $60,000 and have $1 million in assets and won't receive any aid based upon need.''

The U.S. tax code helps offset some tuition bills. When it comes to the credits available, you must know if you qualify to use them:

-- The tuition and fees deduction allows you to write off up to $4,000 in education expenses. It's available to married couples with $160,000 or less in adjusted gross income and singles making less than $80,000.

Credits Worthwhile

-- The Hope credit covers only two years of qualified tuition and fees up to $1,500. It can be used by married couples with adjusted gross income under $105,000 and singles earning $52,000.

-- Lifetime Learning Credit. With the same income restrictions, this credit covers up to $2,000 in college costs, or up to 20 percent of the first $10,000. You can take either this credit or the Hope, but not both. Only one credit per child is allowed.

Interest deductions allow you to write off up to $2,500 in student loan interest annually. Income limits are $130,000 for couples and $65,000 for singles.

Both the Hope and Lifetime credits also cover you, your spouse or anyone you claim as a dependent. You still have to meet the IRS's income guidelines, though.

While you may not qualify for these breaks, your children may if they aren't claimed as dependents and they have earned income.

Beyond the Breaks

If you don't qualify for any of those tax breaks, don't despair. There are other routes to tax savings.

You can gift assets to your children to pay for college. When giving appreciated securities, they will probably pay 10 percent capital gains tax if the securities were held a year or more, and they are in the lowest federal income-tax brackets.

Here's the double-barreled tax break: Since your children are in that low bracket, they also may qualify for the Hope or Lifetime credits and the other deductions if they are paying for college expenses from their own assets. Again, they can't take the credits if they are claimed as dependents.

If your children are receiving aid from their grandparents, ask them to hold off until the children have graduated. Once the money is in their name, the children are subject to the 35 percent financial aid penalty.

Other Strategies

When you integrate your tax and college planning, the general rule is pay for college with as few after-tax dollars as possible.

Keep in mind that you can also use money in Roth IRAs for college funding and not be subject to an early withdrawal penalty. Since that money is in your name, it won't hurt your children's aid prospects.

While the complexity and unfairness of taxes and college planning may be stressful, it pays to get help. Consult a college or tax planner on how to finance education long before the university sends you the bills -- preferably before your child is in middle school.

If you develop a plan that sets enough money aside for college while lowering your tax bill, it should be academic from there.

To contact the writer of this column:
John F. Wasik in Chicago at  jwasik@bloomberg.net.