Wondering what are qualified education expenses? Check out this blog post for everything you need to know about how to qualify for education tax benefits.
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Qualified Education Expenses
Qualified education expenses are those incurred for tuition, related fees, books, and other supplies for enrollment or attendance at an eligible educational institution. Qualified education expenses also include certain room and board costs, as well as other required course-related expenses, such as transportation.
Tuition and Fees
Qualified education expenses for the American Opportunity Tax Credit and the Lifetime Learning Credit include tuition and mandatory fees required for enrollment or attendance at an eligible educational institution. Fees that are not required for enrollment or attendance, such as student activity fees, athletic fees, and parking fees, do not qualify.
The cost of course-related books, supplies, and equipment needed for a student to attend an eligible educational institution also qualify as qualified education expenses. If these supplies are purchased from the educational institution as a condition of enrollment or attendance, the entire cost qualifies even if the student could have purchased them elsewhere.
Room and Board
Room and board are considered qualified education expenses if you are enrolled at least half-time in a degree or certificate program at an eligible institution. To qualify, the expenses must be for academic periods for which enrollment is properly documented, such as a semester or trimester. Room and board expenses include:
-Standard tuition and fees charged by the institution for room and board, whether or not you actually live on campus
-Rent and utility costs incurred while living off campus
-Meal plans purchased through the institution
-Costs associated with a cooperative education program that is part of your degree or certificate program
Books and Supplies
One of the most common questions we get is what are considered qualified education expenses? Qualified education expenses are those incurred while attending an eligible educational institution. The IRS defines an eligible educational institution as “any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution.”
The most common qualified education expenses are tuition and fees required to enroll in or attend an eligible educational institution. These expenses also include amounts paid for course-related books, supplies, and equipment. You can also deduct the cost of student-activity fees and special-needs services in some cases.
If you’re planning on attending college or another type of postsecondary education this year, you may be able to deduct some of your costs on your tax return. The Internal Revenue Service (IRS) allows you to deduct certain qualified education expenses from your taxable income.
To qualify for the deduction, you must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution. You can’t claim the deduction if you’re enrolled in a program for sport, game or hobby OR if someone else claims an American opportunity tax credit or lifetime learning credit for you, your spouse, or a dependent on their tax return.
The Deduction for Qualified Educational Expenses is an “above the line” deduction which means it reduces your taxable income even if you don’t itemize deductions on Schedule A of Form 1040.
Other Qualified Education Expenses
In addition to tuition and fees, other expenses may be considered qualified education expenses. These can include:
-Room and board
-Books and supplies
-Equipment and other necessary expenses for enrolled students, such as a computer
-Certain expenses for special needs students
-Expenses to attend a study abroad program that is approved for credit by the student’s home school
Qualified Education Institutions
Qualified education expenses are those incurred by the student while attending an eligible educational institution. The expenses must be for tuition, books, supplies, and equipment required for enrollment or attendance at the institution. Qualified education expenses also include certain other costs, such as room and board. To be eligible, the educational institution must be accredited by the U.S. Department of Education or be an eligible post-secondary institution.
Eligible Educational Institutions
To be an eligible educational institution, a school must be any college, university, vocational school, or other postsecondary educational institution that is described in section 481 of the Higher Education Act of 1965. This includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The term encompasses not only institutions that award academic degrees (such as baccalaureate and graduate degrees), but also institutions that do not award academic degrees but do provide other formal postsecondary education, such as in the form of undergraduate or graduate credits leading to a degree.
Ineligible Educational Institutions
In order for an educational institution to be eligible to participate in the federal student aid programs, it must be accredited by an accrediting agency or association that is recognized by the U.S. Department of Education (ED) as a “National Recognized Accrediting Agency” or a “Regional Accrediting Agency.”
There are also other requirements that an institution must meet in order to participate in the federal student aid programs. For example, the institution must be located in the United States or its territories, and it must offer a program of at least two academic years in length that leads to a degree or professional credential.
The following types of institutions are ineligible to participate in the federal student aid programs:
-Vocational, technical, and career schools that are not accredited by an accrediting agency recognized by the U.S. Department of Education.
– Schools that only offer correspondence courses.
– Schools that only offer religious instruction (but not other types of education).
– Schools that have been excluded from participation by ED because they violated federal student aid program regulations.
How to Use Qualified Education Expenses
There are a lot of ways to get tax breaks when you have kids in school. One way is to make sure you are taking advantage of all the qualified education expenses that are available to you. This can help you lower your overall tax bill and save you money. Let’s take a look at what qualified education expenses are and how you can use them.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a tax credit for undergraduate students, covering up to $2,500 of tuition and related expenses. The credit is available for the first four years of undergraduate study, and is partially refundable; if the student or the student’s family has insufficient tax liability to absorb the full credit, up to $1,000 can be refunded. To be eligible for the American Opportunity Tax Credit, the student must be enrolled at least half-time in a degree or credential program, and cannot have finished more than one-half of the program before the start of the tax year. The student must also not have been previously convicted of a felony drug offense.
Lifetime Learning Credit
The Lifetime Learning Credit is a tax credit that helps with the cost of post-secondary education. The credit is worth up to $2,000 per eligible student, and there is no limit on the number of years you can claim the credit. To be eligible for the Lifetime Learning Credit, you must be enrolled in an eligible educational institution and be taking courses to acquire or improve job skills. You do not have to be pursuing a degree to qualify for the Lifetime Learning Credit.
Coverdell Education Savings Accounts
A Coverdell education savings account (ESA) is a tax-advantaged account that helps save for a child’s education expenses. You can contribute up to $2,000 per year per child, and the money grows tax-free. Withdrawals are also tax-free as long as they’re used to pay for qualified education expenses.
You can open a Coverdell ESA at most major banks and brokerage firms. Once you open the account, you name a beneficiary — typically, your child. You control the account until the beneficiary reaches age 18 (or 21 in some cases), at which point he or she takes over.
Coverdell ESAs have income limits, so if your modified adjusted gross income (MAGI) is too high, you won’t be able to contribute. For 2020, single filers with MAGI of $95,000 or more and married couples filing jointly with MAGI of $190,000 or more are not eligible to contribute.
There are also restrictions on how the money in a Coverdell ESA can be used. Withdrawals are only tax-free if they’re used to pay for qualified education expenses at an eligible institution — which includes most colleges and universities, as well as certain vocational schools. Qualified expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance. Room and board expenses may also be included if the student is enrolled at least half time.
If you withdraw money from a Coverdell ESA for non-qualified expenses, you’ll owe taxes on the earnings portion of the withdrawal as well as a 10% penalty. So it’s important to make sure you only use Coverdell ESA funds for their intended purpose.