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Higher Education Expenses Eligible for Tax Breaks

Higher Education Expenses Eligible for Tax Breaks

If you decide to go back to school or help pay for the tuition of a child or grandchild, keep in mind that certain types of expenses may qualify for special tax treatment. Many pension and co-worker savings accounts have rules that allow special tax treatment for withdrawals used for qualified higher education expenses (QHEEs).


What expenses are eligible for special tax treatment?

The IRS website defines qualifying higher education expenses as:

"Tuition, books, supplies, fees, and equipment required for a student to enroll in or attend a qualifying educational institution. It also includes charges for special needs services incurred by or for students with special needs as part of their enrollment or attendance. If the person is at least a part-time student, then room and dining are eligible for graduate school fees." 

Many schools or programs now require computers (maybe even an iPad). In this case, this expense would count as "equipment necessary for the enrollment or attendance of a student." And remember that for part-time students, accommodation and meals are limited.

In the event of an audit, be sure to keep a list of school equipment and all lesson plan requirements. Of course, you'll also want to keep your receipts to show how much you paid for what.

Suppose the student is eligible for other benefits, such as lifelong learning credit. They may be required to pursue something called "Adjusted Qualified Higher Education Expenses" (AQHEE), and only the lower adjusted amount would qualify for the tax exemption on distribution.


Examples of tax breaks for education expenses

Many types of savings and investment accounts allow you to withdraw funds tax-free, such as 529 plans and Roth IRAs, as long as the distributions are used for eligible higher education expenses. Early individual retirement accounts (IRAs) withdrawals before the age of 59½ used for QHEEs will be exempt from the 10% early withdrawal penalty, although the amount withdrawn will still be subject to common income tax.

Students who work at the school can also exclude certain benefits from taxable income, which reduces their total taxation.


Online Resources for Qualification

One of the best sources of information is the IRS Tax Benefits Education Center, as it is under their control to determine what is and what is not considered a qualified education expense. The easy to use information center will provide additional information on topics such as:

  • Who can claim an education expense tax credit

  • Which taxes and fees are deductible (depending on marital status)

  • Whether student loan interest is tax-deductible (based on modified adjusted gross income limits)

  • Define eligible student loan

  • Define eligible education expenses (tuition and fees, room and board, books, supplies, equipment, other expenses such as transportation)

  • Determine the number of spaces and tables to which you are entitled

  • Determine if work-related education can be claimed as a business deduction

  • Studies required by the employer or legal provisions

  • Education to maintain or improve skills

However, to avoid information overload or take too much information that is not needed, you should consider talking to an attorney.


Frequently Asked Questions

Is there an age limit for benefiting from educational tax breaks?

Your age does not determine whether you qualify for an education tax exemption in most cases. Other factors, such as part-time or full-time status or what you are using the funds for, will be more relevant. There are many unique tax exemptions with their own rules. Breaks, such as lifelong learning credits and certain work-related study deductions, are generally unavailable to traditionally young college students.


Can I claim educational expenses for tax purposes if I pay for someone else?

Parents or family members often set up special savings accounts for the child's future education. The tax deductions that come with these accounts apply to the account holder making contributions and withdrawals. Employers who pay for the continuing education of their employees can benefit from a business expenses deduction.


Can I use education funds for anything other than tuition?

Most tax breaks and tax-free savings accounts set educational expenses to make tax-free withdrawals or claim deductions. These typically include accommodation and meals, books, supplies, and other expenses necessary for education.


Summary

  • The IRS offers various tax exemption forms for students and taxpayers, as long as the payments are eligible expenses.

  • Individual retirement accounts (IRAs) and 529 plans are just two of many investment accounts that offer tax breaks for funds used for education.

  • Specific definitions and rules describing education-related tax exemptions at the IRS Center for Education Tax Benefits can be found in detail.


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