Higher Education Expenses That Qualify for Tax Breaks

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If you want to head back to school, or help pay for a child or grandchild's educational expenses, you ought to know that certain types of expenses qualify for special tax treatment. Many retirement accounts and college savings accounts have rules that allow for special tax treatment for withdrawals that are used for qualified higher education expenses (QHEEs).

Key Takeaways

  • The IRS offers multiple forms of tax relief for students and those paying for education, so long as the payments are for qualifying expenses.
  • 529 plans and individual retirement accounts (IRAs) are just two of the many types of investment accounts that offer tax breaks for funds used for school.
  • Definitions and particular rules that outline education-related tax breaks can be found in detail at the IRS Tax Benefits for Education Center.

Which Expenses Qualify for Special Tax Treatment?

The IRS website defines qualified higher education expenses as:

"Tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special-needs services incurred by or for special-needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, then room and board are qualified higher education expenses."

Many schools or programs now require computers (perhaps even an iPad). If so, that expense would count as "equipment required for the enrollment or attendance of a student." And note that for part-time students, room and board expenses are subject to a cap.

In case of an audit, make sure to keep any list of required equipment that the school provides, and any requirements provided in the class syllabus. Of course, you'll also want to keep receipts so you can show how much you paid for what.

If the student may qualify for other benefits such as the Lifetime Learning Credit, then you may have to keep track of some thing called "adjusted qualified higher education expenses" (AQHEEs), and only the lower adjusted amount would be eligible for tax breaks on distribution

Examples of Tax Breaks for Education Expenses

There are many types savings and investment accounts that allow you to grow funds tax-free, such as 529 plans and Roth IRAs, so long as distributions are used for qualified higher education expenses. Early IRA withdrawals (before age 59 1/2) used for QHEEs will be exempt from the 10% early-withdrawal penalty tax, although the amount withdrawn would still be subject to ordinary income taxes.

Students who are working while in school may be able to exclude certain benefits from taxable income as well, thereby decreasing their tax liability overall.

You can learn more about this in IRS Publication 970 Tax Benefits for Education.

Online Resources for Eligibility

One of the best go-to sources for information is the IRS Tax Benefits for Education Center, as it is up to them as to what is and what is not considered a qualified educational expense. The easy-to-use information center will provide additional information on such topics as:

  • Who can claim a tax credit for education expenses
  • Which tuition and fees are deductible (based on filing status)
  • Whether or not student loan interest is deductible (based on Modified Adjusted Gross Income limits)
  • Definition of a qualified student loan
  • Definition of qualified education expenses (tuition and fees, room and board, books, supplies, equipment, other expenses such as transportation)
  • Determining how much room and board qualifies
  • Determining whether work-related education can be claimed as a business deduction
  • Education required by employer or by legal stipulations
  • Education to maintain or improve skills

Frequently Asked Questions

Is there an age limit for educational tax breaks?

In most cases, whether you qualify for a certain tax break on your educational costs is not determined by your age. Other factors, such as full-time or part-time status, or what you use the funds for, will be more relevant. There are many unique tax breaks with their own rules. Breaks such as the Lifetime Learner Credit and certain educational deductions for work purposes are generally not available to traditionally younger college students.

Can I claim educational expenses for tax purposes if I'm paying for someone else?

Parents or family members will often set up special savings accounts for a child's future education. The tax perks that come with these accounts apply to the person who owns the account, and to making contributions and withdrawals. Employers who pay for ongoing education for their employees may be able to take a business-expense deduction.

Can I use educational funds for things other than tuition?

Most tax-preferential savings accounts and tax breaks will define educational expenses for the purposes of tax-free withdrawals or claiming deductions, and these often include room and board, books, supplies, and other costs necessary for education.

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