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Education Tax Benefits

If you pay tuition, fees, and other costs for attendance at an eligible educational institution for yourself, your spouse, or your dependent, you may be able to take advantage of one or more of the education tax benefits.

  • You can claim more than one education benefit in a tax year as long as you do not use the same expenses for more than one benefit.
  • Exception: Qualified expenses used to claim education benefits can also be used to eliminate the 10% penalty on premature IRA distributions.
  • You may claim only one of the following education tax benefits for the same student per year: tuition and fees deduction, American Opportunity Credit, or Lifetime Learning Credit.


Education Deductions

Deductions reduce the amount of income subject to income tax. Deductions for education expenses include:

  • Tuition and fees deduction up to $4,000 from gross income. Income limitations apply.
  • Student loan interest deduction up to $2,500 from gross income. Income limitations apply.
  • Business deduction on Schedule C or F. You can deduct the cost of education related to the business or farm activity.
  • Miscellaneous itemized deduction on Schedule A, subject to the 2% AGI limitation. You can deduct the unreimbursed cost of education required to keep your current job or maintain and improve skills needed for your job. You cannot deduct the cost of education that qualifies you for a new trade or business.

Education Tax Credits

Tax credits reduce the amount of income tax you may have to pay. Income limitations apply. The education credits are claimed on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).

  • American Opportunity Credit, $2,500 maximum per student per year.
  • Lifetime Learning Credit, $2,000 maximum per tax return per year.

Penalty Free IRA Distributions

If you withdraw money from your IRA before you are age 591⁄2, you are generally subject to a penalty of 10% of the distribution, in addition to any tax that may be due on the distribution.

  • The 10% penalty does not apply to traditional IRA or Roth IRA withdrawals, if you use the money to pay qualified education expenses for yourself, spouse, or for any child or grandchild of yourself or your spouse.
  • Qualified education expenses include tuition, fees, books, supplies, equipment, and special needs services required for enrollment or attendance at an eligible educational institution. Room and board for students enrolled at least half-time in a degree or certificate program may also qualify.
  • Reduce qualified expenses by scholarships and other tax-free assistance the student receives, but not by gifts or inheritances.

Education Savings Plans

Contributions that you make to education savings plans are not deductible, but the earnings accumulate tax free. In addition, no tax will be owed on distributions if they are less than the beneficiary’s qualified education expenses. Qualified expenses are reduced by scholarships, other tax-free assistance, and amounts used to figure education credits.

  • Qualified Tuition Programs (QTPs). States sponsor QTPs to allow prepayment of a student’s qualified higher education expenses. For information on a specific QTP, you need to contact the state agency or eligible educational institution that established and maintains it. Note: QTPs are also called 529 Plans because they are authorized under section 529 of the Internal Revenue Code.
  • Coverdell Education Savings Accounts (ESAs). A Coverdell ESA can be used to pay a student’s eligible K-12 expenses, as well as higher education expenses. Coverdell ESA contributions are limited to $2,000 total per year for each beneficiary, no matter how many accounts have been established or how many people are contributing. Unless the beneficiary is a person with special needs, contributions to a Coverdell ESA must stop before the beneficiary reaches age 18 and the account balance distributed within 30 days after the beneficiary reaches age 30 (or dies, if earlier).

Exclusions From Gross Income

An exclusion from income means you don’t report the benefit you receive as income and you don’t pay tax on it, but you also can’t use that same tax-free benefit for a deduction or credit.

  • You may exclude the part of scholarships, fellowships, and grants that you use for qualifying education expenses while you are a degree candidate.
  • You may exclude up to $5,250 paid for you under a qualifying educational assistance plan. Additional amounts are included in your W-2 income, unless they are a working condition fringe benefit. A working condition fringe benefit is an amount that you could have deducted as an employee business expense, had you paid for it instead of your employer.
  • If you cash in qualified U.S. Savings Bonds to pay for eligible education expenses for your-self, spouse, or your dependent, you may exclude the bond interest from income.

Here at Valentine CPA, we’re here to help make life easy. Reach out to us today for any tax or financial questions or concerns!

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