Education Tax Benefits

Education Tax Benefits

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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.

For each student, you can elect for any year only one of

the credits. For example, if you elect to claim the American

Opportunity Credit for the student in 2018, you cannot

use that same student’s qualified education expenses

to figure the Lifetime Learning Credit for 2018.

Education Deductions.

Deductions reduce the amount of income subject to income

tax. Deductions for education expenses include:

• 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 activities.


Tax Benefits

Comparison of Education Credits

American Opportunity Credit Lifetime Learning


Up to $2,500 per eligible student. Up to $2,000 per tax


100% of the first $2,000, plus 25% of the next

$2,000 of qualifying expenses for each student.

20% of the first

$10,000 of total

qualifying expenses.

40% of the credit (up to $1,000) may be


Nonrefundable tax


Eligible years:

• Until the first four years of postsecondary

education are completed.

• Reduced by number of years the American

Opportunity Credit and Hope Credit was

claimed for the student.

Eligible years:

• All years of



Qualifying expenses:

• Tuition, required enrollment fees, and

• Course-related books, supplies, and equipment.

Qualifying expenses:

• Tuition and required

enrollment fees.

The student must be pursuing an

undergraduate degree or other recognized

education credential.

The student need not

be pursuing a degree

or credential.

Student must be enrolled at least half-time for

at least one academic period beginning during

the year.

Student must be

enrolled in at least

one course.

Additional restrictions:

• The student can have no felony convictions.

• Taxpayer cannot use MFS status and cannot

be claimed as a dependent by another person.

• Additional conditions apply for nonresident

aliens and for taxpayers under age 24.



• None.

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. Effective January 1, 2018, 529 Plans may

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 59½, 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


distribute not more than $10,000 in expenses for tuition

during the taxable year for a public, private, or

religious elementary or secondary school. Distributions

in excess of $10,000 are subject to tax. This limitation

applies on a per-student basis, rather than a peraccount

basis. 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


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 must be 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 Bondspay for

eligible education expenses for yourself, spouse, or

your dependent, you may exclude the bond interest

from income. Income limitations apply.

Contact Us

There are many events that occur during the year that can affect

your tax situation. Preparation of your tax return involves summarizing

transactions and events that occurred during the prior

year. In most situations, treatment is firmly established at the

time the transaction occurs. However, negative tax effects can

be avoided by proper planning. Please contact us in advance

if you have questions about the tax effects of a transaction or

event, including the following:

• Pension or IRA distributions.

• Significant change in income or


• Job change.

• Marriage.

• Attainment of age 59½ or 70½.

• Sale or purchase of a business.

• Sale or purchase of a residence

or other real estate.

• Retirement.

• Notice from IRS or other

revenue department.

• Divorce or separation.

• Self-employment.

• Charitable contributions

of property in excess of