What Is an Eligible Educational Institution?

Your Choice of School Can Affect Tax Breaks and Credits

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

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Special tax breaks apply to withdrawals from 529 plans or Roth IRAs (or early withdrawals from traditional IRAs) if the funds are used to pay expenses at an eligible educational institution. These rules can come in handy if you want to pay for college for a child, a grandchild, or even yourself.

Definition of Eligible Educational Institution

This is how the IRS defines an eligible educational institution:

"... [A]ny 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.

By this definition, it's quite likely that your child's school of choice will be eligible, but double-check. If you think it does but it turns out you're wrong, you could lose out on very valuable tax breaks.

How to Find if Your Institution Qualifies

Check the U.S. Department of Education's database for a list of accredited schools and programs. Or, you can contact the school and ask them directly.

There are a number of other look-up tools available online as well, including ones from 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 the Tax Break Works

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.

Education Tax Credit Eligibility

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 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 is for 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 once allowed you to deduct college tuition and fees from your taxable income if they were paid for your spouse, your dependents, or yourself, but this deduction expired on January 1, 2018. It's helpful to keep it in mind, however, if Congress decides to revive it while you're paying for schooling.

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 ten minutes to complete.

You'll be asked questions about your tax filing status, the student's enrollment status, and when and by whom the 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.