What Is an Eligible Educational Institution?

Definition & Examples of Eligible Educational Institutions

Man in cap and gown for graduation from an eligible educational institution.

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An eligible educational institution is any post-secondary educational institution eligible to participate in student aid programs administered by the U.S. Department of Education.

What Is an Eligible Educational Institution?

An eligible educational institution allows special tax breaks for withdrawals from 529 plans or Roth IRAs (or early withdrawals from traditional IRAs). These rules can come in handy if you want to pay for college for a child, a grandchild, or even yourself.

The IRS defines an eligible educational institution as "any college, university, vocational school, or other post-secondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education.

The IRS goes on to say that this definition includes virtually all accredited, public, nonprofit, and for-profit postsecondary institutions.

Eligible educational institutions must issue a Form 1098-T, Tuition Statement to all students. This is one way to verify if a school qualifies. The U.S. Department of Education (DOE) also offers a database of accredited schools and programs. While the DOE does not accredit institutions, it does provide oversight of the accreditation process.

Other look-up tools available online including the federal government's Free Application for Federal Student Aid (FAFSA) site and its College Scorecard site. You can use these sites to gather more information about the school or schools you're interested in

How Eligible Educational Institutions Work

Early withdrawals taken from a traditional IRA (prior to age 59 1/2) are exempt from the 10% penalty tax if they are used for qualified higher education expenses made to an eligible educational institution. This is one of the exceptions to the IRA early withdrawal penalty tax. Education expenses paid for yourself, a spouse, a child, or a grandchild may all qualify.

In addition, 529 plan withdrawals are tax-free if used for qualified higher education expenses. If your child gets a scholarship, you can withdraw an amount up to the amount of the scholarship penalty-free, but income taxes will still apply.

In addition to penalty-free or tax-free withdrawals, you may also qualify for a tax credit.

Types of Eligible Educational Institution Tax Credits

The IRS website hosts an education tax credit tutorial to help you determine if you are eligible for certain education-related tax credits.

The American Opportunity Credit

This is a maximum credit of $2,500 per eligible student for qualified expenses paid for each of the first four years of college or other higher education.

The Lifetime Learning Credit

This applies to qualified tuition and expenses for eligible students enrolled in an eligible educational institution—even graduate degrees or job skills courses.

The Tuition and Fees Deduction

This allows you to deduct college tuition and fees from your taxable income if they were paid for your spouse, your dependents, or yourself, It had been discontinued, but returned and restored eligibility in 2018, 2019, and 2020. The deduction is due to expire at the end of 2020.

To determine if you qualify for one of these tax credits, the IRS site will walk you through a questionnaire called the Interactive Tax Assistant. It will take about 10 minutes to complete.

You'll be asked questions about your tax filing status, the student's enrollment status, and when and by whom expenses were paid. You can also expect more detailed questions about whether any expenses were paid with tax-exempt funds, or paid with distributions from a Coverdell Education Savings Account or Qualified Tuition Program.

The IRS will also want to know your past year's Adjusted Gross Income (AGI) and whether the student is able to be claimed on someone else's return. Following the rules for credits and tax breaks on paying for education can help you save money and make paying for college more affordable.

Key Takeaways

  • An eligible education institution is recognized by the Department of Education.
  • Its status gives tax benefits, such as penalty-free early IRA withdrawals to pay for tuition.
  • Tax credits can also be taken for eligible education institutions.
  • Check if your post-secondary institution is eligible by using a government look-up database.