Which Education Expenses Are Tax Deductible?

woman taking online courses

For many Americans, their years spent in college are a time when every little extra dollar counts. Fortunately, the government sees this, but they also value higher education so much that there are many different exclusions of income, tax deductions, and tax credits that can be utilized that are associated with different aspects of cost spent on education. 

This article will cover some of the savings programs that parents can utilize that have tax benefits. Then we will go through some of the exclusions and deductions from college expenses that can be utilized on the return to reduce taxable income as well as the different credits that can reduce the actual tax debt owed or maybe even get you a bigger refund. We all know that any sort of tax refund especially when things are tight helps.

 

Saving For Your Child’s College Expenses

There are many different programs and types of savings accounts that have specific tax benefits if the distributions from that account are for higher learning.

Education Savings Bond Program

A taxpayer may exclude all or part of the interest received on the redemption of qualified US savings bonds during the year if the taxpayer uses that interest to pay for qualified higher educational expenses during the same year.

Coverdell Education Savings Account

A Coverdell ESA is a trust or custodial account created or organized in the United State only for paying the qualified education expenses of the designated beneficiary of the account. While there is no tax deduction for contributions, earnings are tax-deferred. You can exclude distributions from a Coverdell ESA from income up to the number of qualified education expenses for the year, adjusted for other benefits received.

Qualified Tuition Programs

A qualified tuition program is a program set up to allow the taxpayer to either prepay or contribute to an account established for paying a student’s qualified expenses at an eligible educational institution. A state, a state agency, an instrumentality of a state, or an eligible educational institution can establish and maintain a QTP.

All these savings mechanisms can help you set aside a nice nest egg for your child’s college education while avoiding taxation. One major qualifier of each one is that the distributions must be spent on qualified education expenses.  

The qualified educational expense for these programs is the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance to an eligible educational institution. They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. These are the qualified expenses for this type of savings program but remember different tax breaks have different criteria for what is considered a qualifying expense.

Another big way to save money while paying for college is by receiving scholarships and fellowships. These scholarships can provide a path to higher education that may not be feasible by other means. The government values this opportunity of higher education, so they provide a tax break on the income of a scholarship used for qualified educational expenses

When it comes to scholarships, qualified educational expenses included are tuition and fees to enroll at or attend an educational institution and any fees, books, supplies, and equipment required for courses at the educational institution. Amounts for room and board do not qualify for this exclusion. 

Another way some parents help their children pay for school is by doing early withdrawals from their IRAs. Typically, when you do an early withdrawal before the age of 59 ½ you must pay a 10% additional tax.  However, if you withdraw the funds to pay for qualified college expenses you can avoid the additional 10% tax. 

The educational expenses must be for yourself, your spouse, you or your spouse’s child, foster child or adopted child, or you or your spouse’s grandchild. Qualified educational expenses in this case include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.

 

What Educational Credits Can I Claim on my Taxes?

Outside of some income being used for paying for educational expenses being excluded many credits can be applied to your filing. A tax credit is designed to reduce taxable income. The amount of the credit that you qualify for comes right off the total payable tax. Sometimes these credits can turn your tax bill into a refund. 

There are two major education tax credits that students can utilize to reduce their tax bill: the American Opportunity Tax Credit & The Lifetime Learning Credit. A student or the parent of the student can only claim one of these credits for that student on a tax filing. If you have more than one child, you can claim either of the credits for each child but not both.

The American Opportunity Tax Credit

This credit could reduce your tax bill by up to $2500 if you paid that much in qualified education expenses. You can claim 100% of the first $2000 that you spent on qualified educational expenses. After that, you can add 25% of the next $2000 spent for a total of $2500. 

To qualify for this, you must make under $180, 000 if filing Married Filing Jointly and $90,000 if filing Single, Head of Household or Qualified Widower. This is a partially refundable credit. It can be refundable up to 40% so up to $1000.

The Lifetime Learning Credit

This credit could reduce your tax bill up to $2000 if you paid for students enrolled in eligible educational institutions. The Lifetime Learning Credit is computed on a family-wide basis. The amount of the Lifetime Learning credit is up to 20% of the first $10,000 of qualified education expenses paid for all eligible students. 

To qualify you must make under $138,000 if Married Filing Jointly and $69.000 if filing Single, Head of Household or Qualified Widower. This is a non-refundable credit.

Qualified living expenses for these two credits must be required for enrollment or attendance at an eligible educational institution and include tuition and required enrollment fees. Expenses include amounts paid to the institution for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and other similar personal expenses do not qualify.

 

Can I Use Educational Expenses as a Deduction?

The American Tax Credit and the Lifetime Learning Credit will give you the biggest tax break available but if you do not qualify there are other possibilities to save some money. You still may be able to claim a tax deduction for college tuition and fees for yourself, your spouse, or your dependents. This education deduction can be worth up to $4000. 

You can get the full amount of your income is under $65,000 on a single return or under $130,000 if you file jointly. The write-off for singles drops to $200 if your income is more than $65,000 and it disappears when your income passes $80,000. For married couples, the max is $2000 when income passes $130,000 and it is wiped out when income exceeds $160,000.  

Qualified expenses that can be used for this deduction are tuition, student fees, and required expenses for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and similar personal living expenses do not qualify. 

If you are self-employed generally can deduct the cost of work-related educational expenses. This will reduce the amount of income subject to both the federal income tax and self-employment tax. The education must be required to keep your present salary, status, or job or to maintain or improve skills needed in your present work. 

Expenses cannot be used in the education is needed to meet the minimum educational requirements of your present trade or business or if the expenses are for a program that will qualify you for a new trade or business. The qualified expenses that can be written off by self-employed individuals are tuition, books, supplies, lab fees, certain transportation, and travel costs.

With all these exclusions, credits, and deductions you cannot double-dip. You cannot deduct tuition and fees if:

  • You also deduct those expenses for another reason (e.g., as a business expense);
  • You or anyone else claims an American Opportunity or Lifetime Learning Credit for the same student in the same year.
  • The expenses are used to figure the tax-free portion of the 529 plan or Coverdell ESA distribution.
  • The expenses are paid with tax-free interest on U.S. savings bonds; or
  • The expenses are paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer.

In conclusion, as you can see there are a lot of opportunities to save from some of your expenses derived from education. As you can see there are very definitive qualifications and distinct benefits to all these different credits, deductions, and exclusions. 

That is why it is important to reach out to a true tax professional for assistance, so you do not miss out on an opportunity to use them or filing them incorrectly. An IRS Enrolled Agent or CPA has the educational background and licensing to properly advise you and legally save you the most money possible.

 

Ozzie Gomez is a Senior Tax Settlement Agent and the owner of Innovative Tax Relief which holds business licenses in Tax Resolution, Tax Audit Representation and Tax Preparation.  With almost 10 years of experience in the tax resolution industry, he has personally helped more than 4,000 individuals and businesses resolve their tax issues.

Related Posts

a happy older couple

Case Study: Saving Mr. J $117,000

I cannot stress enough how important it is to make sure that all different types of income that you received in a year are reported on your 1040 tax f...