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 (QHEE).
529 plans and Roth IRAs allow you to grow funds tax-free if distributions are used for QHEE. In addition, early IRA withdrawals (before age 59 1/2) used for QHEE will be exempt from the 10% early withdrawal penalty tax, although the amount withdrawn would still be subject to ordinary income taxes.
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, room and board are qualified higher education expenses."
Many schools or programs now require laptops or computers (hmmm... 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. And of course you'll 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 (AQHEE) - and only the lower adjusted amount would be eligible for tax breaks on distribution. You can learn more in Record-keeping for your 529.
Online Resources for Eligibility
Probably the best go-to source 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. Their 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 law stipulations
- Education to maintain or improve skills
Other Tax Breaks for Education Expenses
While working and in school, it is feasible that you may be able to exclude certain benefits from your income. You can learn more in IRS Publication 970 Tax Benefits for Education.