Just wanted to let everyone browsing old threads know, I don't think the above idea is the best way to reduce our taxes on tuition anymore.
I'll be talking to a Tax accountant, but after doing a lot of research, the 529 redirect mentioned above is likely not the best plan for the first $14,000 in grad school tuition or $8000 for undergrad tuition due to the federal deductions. After that point it is possible that the 529 redirect makes sense but you'll have to talk to your own tax guy/gal.
There are 2 federal programs: 1. The American Opportunity Tax Credit and 2. The Lifetime Learning credit.
1. The American Opportunity Tax Credit can only be used on the first 4 years of post-secondary education so only works for people doing undergraduate work. But it gives a federal tax decrease of 100% on the first $2000 of tuition and 25% of the second $2000 of tuition. Also up to $1000 of the $2500 can be a tax refund (where they pay you)
2. The Lifetime Learning Credit pays for 20% of up to the first $10,000 of qualified expenses. Anyone can claim it for any number of years.
You also can deduct up to $4000 of qualified higher education expenses from your income (not sure if this is instead of or in addition to the standard deduction).
So with my case, we'll likely have $7500 of tuition expenses plus about $7000 of other qualified expenses. So we'd deduct the first $4000 to save the 25% federal taxes we'd pay, then use the lifetime learning Credit to pay for 20% of the next $10k. We'd have about $500 left that we could do a 529 redirect with but with a state tax rate of 4.3% we'd only be saving $21 in state taxes so I'm not sure its worth it.