What is an Eligible Educational Institution for Tax Purposes?

Tax breaks may apply for tuition paid to an eligible educational institution

Man in cap and gown for graduation from an eligible educational institution.
Distributions paid to an eligible educational institution may be eligible for tax breaks. Tom Merton / Getty Images

Special tax breaks apply to withdrawals from certain types of accounts (like 529 plans, Roth IRAs, or early withdrawals from regular IRAs) if the funds are used for qualified educational expenses paid to an eligible educational institution.

These rules can come in handy if you want to help pay for your own college, fund a second career, pay for a child's college, or help pay for a grandchild's college.

 

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. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions. The educational institution should be able to tell you if it is an eligible educational institution."

If you are considering additional education for you or a family member ask the educational institution if it is considered eligible under IRS Rules. You can also check the US Department of Education's database for a list of accredited schools and programs.

How does the tax break work?

Early withdrawals taken from an IRA (withdrawals prior to age 59 1/2) will be 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, child or grandchild may all qualify.

In addition, 529 plan withdrawals will be 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 apply in the case of this type of withdrawal.

In addition to penalty-free or tax-free withdrawals for certain types of accounts, if you are paying for school at an eligible educational institution you may qualify for a tax credit.

Are you eligible to claim an education tax credit?

The IRS website hosts an education tax credit tutorial which can help you determine if you are eligible for a tax credit. It will take approximately ten minutes to complete. 

You will have to select:

  • the tax year asking about, 
  • your filing status (single, married, etc,)
  • if you are claimed as a dependent for another taxpayer,
  • if your school participated in student aid programs,
  • if the student was enrolled at least half-time,
  • identification of who the student is in relation to the person filling out the survey,
  • when exactly the education money was paid,
  • who paid for the expense,
  • it asks if any portion of the expenses were paid with tax exempt funds,
  • if any refunds were given,
  • whether or not qualified distributions from Coverdell Education Savings Accounts or Qualified Tuition Programs were used,
  • whether or not the education expenses are on the tax return anywhere else,
  • if there has already been four years of postsecondary school credit issued (college degree,)
  • previous year's Adjusted Gross Income (AGI,)
  • foreign income claims,
  • Form 8903 filer for domestic production,
  • eligibility to be claimed on another taxpayer's filing.

Following the rules for credits and tax breaks on paying for education can help you save money and make paying for college more affordable.