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.
Education
Tax Benefits
Comparison of Education Credits
American Opportunity Credit Lifetime Learning
Credit
Up to $2,500 per eligible student. Up to $2,000 per tax
return.
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
refundable.
Nonrefundable tax
credit.
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
postsecondary
education.
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.
Additional
restrictions:
• 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
inheritances.
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
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 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
deductions.
• 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
$5,000.
