Chapter 36
Education credits and other education tax benefits
What’s New
Limits on modified adjusted gross income (MAGI). The lifetime learning credit MAGI limit increases to $132,000 if you are filing married filing jointly ($66,000 if you are filing single, head of household, or qualifying widow(er)).
The American opportunity credit MAGI limits remain unchanged. See Table 36.1.
Table 36.1 Comparison of Education Credits for 2017
| Caution. You can claim both the American opportunity credit and the lifetime learning credit on the same return—but not for the same student. | ||
| American Opportunity Credit | Lifetime Learning Credit | |
| Maximum credit | Up to $2,500 credit per eligible student | Up to $2,000 credit per return |
| Limit on modified adjusted gross income (MAGI) | $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) | $132,000 if married filing jointly; $66,000 if single, head of household, or qualifying widow(er) |
| Refundable or nonrefundable | 40% of credit may be refundable | Nonrefundable—Credit limited to the amount of tax you must pay on your taxable income |
| Number of years of postsecondary education | Available ONLY if the student had not completed the first 4 years of postsecondary education before 2017 | Available for all years of postsecondary education and for courses to acquire or improve job skills |
| Number of tax years credit available | Available ONLY for 4 tax years per eligible student (including any year(s) the Hope scholarship credit was claimed) | Available for an unlimited number of years |
| Type of program required | Student must be pursuing a program leading to a degree or other recognized education credential | Student does not need to be pursuing a program leading to a degree or other recognized education credential |
| Number of courses | Student must be enrolled at least half time for at least one academic period beginning during 2017 (or the first 3 months of 2018 if the qualified expenses were paid in 2017) | Available for one or more courses |
| Felony drug conviction | At the end of 2017, the student had not been convicted of a felony for possessing or distributing a controlled substance | Felony drug convictions do not make the student ineligible |
| Qualified expenses | Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance | Tuition and required enrollment fees (including amounts required to be paid to the institution for course-related books, supplies, and equipment) |
| Payments for academic periods | Payments made in 2017 for academic periods beginning in 2017 or beginning in the first 3 months of 2018 | |
Text intentionally omitted.
Reminders
Form 1098T requirement. The law requires a taxpayer (or a dependent) to have received a Form 1098-T from an eligible educational institution in order to claim the American opportunity credit or the lifetime learning credit. In most cases, the student should receive Form 1099-T from the eligible education institution by January 31, 2018.
Text intentionally omitted.
Taxpayer identification number needed by due date of return. If you do not have a taxpayer identification number (TIN) by the due date of your 2017 return (including extensions), you cannot claim the American opportunity credit on either your original or an amended 2017 return, even if you later get a TIN. Also, the American opportunity credit is not allowed on either your original or an amended 2017 return for a student who does not have a TIN by the due date of your return (including extensions), even if that student later gets a TIN.
Coordination with Pell grants and other scholarships or fellowship grants. It may benefit you to choose to include otherwise tax-free scholarships or fellowship grants in income. This may increase your education credit and lower your total tax or increase your refund. See Coordination with Pell grants and other scholarships or fellowship grants, later in this chapter.
Ban on claiming the American opportunity credit. If you claim the American opportunity credit even though you are not eligible, you may be banned from claiming the credit for up to 10 years. See the Caution statement, later.
Achieving a Better Life Experience (ABLE) account. This is a savings account for individuals with disabilities and their families. Distributions are tax free if used to pay the beneficiary’s qualified disability expenses, which may include education expenses. For more information, see Pub. 907, Tax Highlights for Persons With Disabilities.
For 2017, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are:
- The American opportunity credit, and
- The lifetime learning credit.
This chapter will present an overview of these education credits. To get the detailed information you will need to claim either of the credits, and for examples illustrating that information, see chapters 2 and 3 of Pub. 970.
Can you claim more than one education credit this year? For each student, you can elect for any year only one of the credits. For example, if you choose to claim the American opportunity credit for a child on your 2017 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2017.
If you are eligible to claim the American opportunity credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both.
If you pay qualified education expenses for more than one student in the same year, you can choose to claim the American opportunity and the lifetime learning credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year.
Differences between the American opportunity and lifetime learning credits. There are several differences between these two credits. These differences are summarized in Table 36.1.
Useful Items
You may want to see:
Publication
- 970 Tax Benefits for Education
Form (and Instructions)
- 8863 Education Credits (American Opportunity and Lifetime Learning Credits)
Who Can Claim an Education Credit
You may be able to claim an education credit if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. For 2017, the credits are based on the amount of qualified education expenses paid for the student in 2017 for academic periods beginning in 2017 and in the first 3 months of 2018.
For example, if you paid $1,500 in December 2017 for qualified tuition for the spring 2018 semester beginning in January 2018, you may be able to use that $1,500 in figuring your 2017 education credit(s).
Academic period. An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. If an educational institution uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.
Eligible educational institution. An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions meet this definition. The educational institution should be able to tell you if it is an eligible educational institution.
Who can claim a dependent’s expenses. If an exemption is allowed for any person who claims the student as a dependent, all qualified education expenses of the student are treated as having been paid by that person. Therefore, only that person can claim an education credit for the student. If a student is not claimed as a dependent on another person’s tax return, only the student can claim a credit.
Expenses paid by a third party. Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. However, qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. Therefore, you are treated as having paid expenses that were paid by the third party. For more information and an example see Who Can Claim a Dependent’s Expenses in Pub. 970, chapter 2 or 3.
Who cannot claim a credit. You cannot take an education credit if any of the following apply.
- Your filing status is married filing separately.
- You are claimed as a dependent on another person’s tax return, such as your parent’s return.
- You (or your spouse) were a nonresident alien for any part of 2017 and the nonresident alien did not elect to be treated as a resident alien for tax purposes.
- You did not have an SSN (or ITIN) by the due date of your 2017 return (including extensions), you cannot claim the American opportunity credit on either your original or an amended 2017 return, even if you later get an SSN (or ITIN). Also, you cannot claim this credit on your original or an amended 2017 return for a student who did not have an SSN, ATIN, or ITIN by the due date of your return (including extensions), even if the student later gets one of those numbers.
- Your MAGI is one of the following.
- American opportunity credit: $180,000 or more if married filing jointly, or $90,000 or more if single, head of household, or qualifying widow(er).
- Lifetime learning credit: $132,000 or more if married filing jointly, or $66,000 or more if single, head of household, or qualifying widow(er).
Generally, your MAGI is the amount on your Form 1040, line 38, or Form 1040A, line 22. However, if you are filing Form 2555, Form 2555-EZ, or Form 4563, or are excluding income from Puerto Rico, add to the amount on your Form 1040, line 38, or Form 1040A, line 22, the amount of income you excluded. For details, see Pub. 970.
Figure 36.1 may be helpful in determining if you can claim an education credit on your tax return.
Figure 36.1 Can You Claim an Education Credit for 2017?
Qualified Education Expenses
Generally, qualified education expenses are amounts paid in 2017 for tuition and fees required for the student’s enrollment or attendance at an eligible educational institution. It does not matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds.
For course-related books, supplies, and equipment, only certain expenses qualify.
- American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
- Lifetime learning credit: Qualified education expenses include amounts for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance.
Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. However, fees for personal expenses (described below) are never qualified education expenses.
Qualified education expenses for either credit do not include amounts paid for the following.
- Personal expenses. This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses.
- Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student’s degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills.
The Form 1098-T, Tuition Statement, issued by an institution to the student from the institution may report either payments received in 2017 (box 1) or amounts billed in 2017 (box 2). However, the amount on your Form 1098-T, box 1 or 2, may be different from the amount you paid (or are treated as having paid). In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2017, reduced as necessary, as described in Adjustments to Qualified Education Expenses, later. See chapters 2 and 3 of Pub. 970 for more information on Form 1098-T.
Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you.
If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits.
Prepaid Expenses. Qualified education expenses paid in 2017 for an academic period that begins in the first 3 months of 2018 can be used in figuring an education credit for 2017 only. See Academic period, earlier. For example, if you pay $2,000 in December 2017 for qualified tuition for the 2018 winter quarter that begins in January 2018, you can use that $2,000 in figuring an education credit for 2017 only (if you meet all the other requirements).
Paid with borrowed funds. You can claim an education credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student’s account.
Student withdraws from class(es). You can claim an education credit for qualified education expenses not refunded when a student withdraws.
No Double Benefit Allowed
You cannot do any of the following.
- Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an education credit based on those same expenses.
- Claim more than one education credit based on the same qualified education expenses.
- Claim an education credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP).
- Claim an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to Qualified Education Expenses, next.
Adjustments To Qualified Education Expenses
For each student, reduce the qualified education expenses paid in 2017 by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student.
Tax-free educational assistance. For tax-free educational assistance received in 2017, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. See Academic period, earlier.
Tax-free educational assistance includes:
- The tax-free parts of scholarships and fellowship grants (including Pell grants) (see chapter 12 of this publication and chapter 1 of Pub. 970, for more information),
- The tax-free part of employer-provided educational assistance (see Pub. 970),
- Veterans’ educational assistance (see chapter 1 of Pub. 970), and
- Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
Generally, any scholarship or fellowship is treated as tax-free educational assistance. However, a scholarship or fellowship grant is not treated as tax-free educational assistance to the extent the student includes it in gross income (the student may or may not be required to file a tax return) for the year the scholarship or fellowship grant is received and either:
- The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1; or
- The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1.
Coordination with Pell grants and other scholarships. You may be able to increase an education credit and reduce your total tax or increase your tax refund if the student (you, your spouse, or your dependent) chooses to include all or part of certain scholarships or fellowship grants in income. The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for expenses other than qualified education expenses (such as room and board).
The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses (such as tuition and related fees) does not prevent the student from choosing to apply certain scholarships or fellowship grants to other expenses (such as room and board). By choosing to do so, the student will include the part applied to other expenses (such as room and board) in gross income and may be required to file a tax return. However, this allows payments made in cash, by check, by credit or debit card, or with borrowed funds such as a student loan, to be applied to qualified education expenses. These payments, unlike certain scholarships or fellowship grants, will not reduce the qualified education expenses available to figure an education credit. The result is generally a larger education credit that reduces your total tax or increases your tax refund.
Example 1. Last year, your child graduated from high school and enrolled in college for the fall semester. You and your child meet all other requirements to claim the American opportunity credit, and you need to determine adjusted qualified education expenses to figure the credit.
Your child has $5,000 of qualified education expenses and $4,000 of room and board. Your child received a $5,000 Pell grant and took out a $2,750 student loan to pay these expenses. You paid the remaining $1,250. The Pell grant by its terms may be used for any of these expenses.
If you and your child choose to apply the Pell grant to the qualified education expenses, it will qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Your child will not include any part of the Pell grant in gross income. After reducing qualified education expenses by the tax-free scholarship you will have $0 ($5,000 − $5,000) of adjusted qualified education expenses available to figure your credit. Your credit will be $0.
Example 2. The facts are the same as in Example 1. If, unlike in Example 1, you and your child choose to apply only $1,000 of the Pell grant to the qualified education expenses and to apply the remaining $4,000 to room and board, only $1,000 will qualify as a tax-free scholarship.
Your child will include the $4,000 applied to room and board in gross income, and it will be treated as earned income for purposes of determining whether your child is required to file a tax return. If the $4,000 is your child’s only income, your child will not be required to file a tax return.
After reducing qualified education expenses by the tax-free scholarship you will have $4,000 ($5,000 − $1,000) of adjusted qualified education expenses available to figure your credit. Your refundable American opportunity credit will be $1,000. Your nonrefundable credit may be as much as $1,500 but depends on your tax liability.
If you are not otherwise required to file a tax return, you should file to get a refund of your $1,000 refundable credit but your tax liability and nonrefundable credit will be $0.
Note. The result may be different if your child has other income or if you are the student. If you are the student and you claim the earned income credit, choosing not to apply a Pell grant to qualified education expenses may decrease your earned income credit at certain income levels by raising your adjusted gross income. However, you generally need at least $2,000 of adjusted qualified education expenses to receive the maximum benefit of claiming both credits. For more information, see Coordination with Pell grants, and other scholarships in chapters 2 and 3 of Pub. 970.
Tax-free educational assistance treated as a refund. Some tax-free educational assistance received after 2017 may be treated as a refund of qualified education expenses paid in 2017. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2017 for qualified education expenses paid on behalf of a student in 2017 (or attributable to enrollment at an eligible educational institution during 2017).
If this tax-free educational assistance is received after 2017 but before you file your 2017 income tax return, see Refunds received after 2017 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2017 and after you file your 2017 income tax return, see Refunds received after 2017 and after your income tax return is filed, later.
Refunds. A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. Some tax-free educational assistance received after 2017 may be treated as a refund. See Tax-free educational assistance, earlier.
Refunds received in 2017. For each student, figure the adjusted qualified education expenses for 2017 by adding all the qualified education expenses paid in 2017 and subtracting any refunds of those expenses received from the eligible educational institution during 2017.
Refunds received after 2017 but before your income tax return is filed. If anyone receives a refund after 2017 of qualified education expenses paid on behalf of a student in 2017 and the refund is received before you file your 2017 income tax return, reduce the amount of qualified education expenses for 2017 by the amount of the refund.
Refunds received after 2017 and after your income tax return is filed. If anyone receives a refund after 2017 of qualified education expenses paid on behalf of a student in 2017 and the refund is received after you file your 2017 income tax return, you may need to repay some or all of the credit that you claimed. See Credit recapture, next.
Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2017, or any refund of your qualified education expenses paid in 2017, is received after you file your 2017 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2017 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2017 and figure the amount by which your 2017 tax liability would have increased if you had claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received.
Example. You paid $8,000 for tuition and fees in December 2017 for your child’s Spring semester beginning in January 2018. You filed your 2017 tax return on February 3, 2018, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid × .20). You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $1,400. You must refigure your 2017 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). The refigured credit is $1,320 and your tax liability increased by $280. You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2018 income tax return. See the instructions for your 2018 income tax return to determine where to include this tax.
Amounts that do not reduce qualified education expenses. Do not reduce qualified education expenses by amounts paid with funds the student receives as:
- Payment for services, such as wages,
- A loan,
- A gift,
- An inheritance, or
- A withdrawal from the student’s personal savings.
Do not reduce the qualified education expenses by any scholarship or fellowship grant reported as income on the student’s tax return in the following situations.
- The use of the money is restricted, by the terms of the scholarship or fellowship grant, to costs of attendance (such as room and board) other than qualified education expenses, as defined in chapter 1 of Pub. 970.
- The use of the money is not restricted.
For examples, see chapter 2 in Pub. 970.
Table 36.2 Other Education Tax Benefits
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There are many education tax incentives in addition to the American opportunity credit and lifetime learning credit. Some of the more popular incentives are summarized below. Student loan interest deductions If your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), student loan interest paid is deductible if the interest was paid on a loan that you took out to pay for qualified higher education expenses at an eligible educational institution for yourself, your spouse, or your dependent. Qualified higher education expenses include the costs of tuition, fees, room and board, books, supplies, and equipment. You cannot deduct interest on a loan for which you are not legally obligated to make the payments nor can you deduct interest if you did not actually make payments. |
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| Benefit | If you paid interest on a qualified education loan in 2017, you may be able to deduct up to $2,500 of the interest paid on your 2017 tax return. |
| Qualifications | You can claim the deduction if the following requirements are met: (1) Your filing status is any filing status except married filing separately, (2) No one else can claim an exemption for you on his or her tax return, (3) You paid interest on a qualified student loan. |
| Income Limits | For 2017, the phaseout range for taxpayers who are single, head of household, or qualifying widow(er) is $65,000 to $80,000. For taxpayers filing joint returns, the phaseout range is $135,000 to $165,000. |
For more information on the student loan interest deduction, see chapter 19, Education-related adjustments.
Forgiveness of certain student loans
| Benefit | When any loan for which you are responsible is forgiven, you generally must include the amount that was forgiven in your gross income. When certain student loans are forgiven, however, you may not have to include the amount in your income. |
| Qualifications | Your loan must provide that all or a portion of the debt will be canceled if you work for a certain period of time, in certain professions, and for a designated class of employers. The loan must have been made by a qualified lender. A qualified lender includes:
If you refinanced a student loan with a loan from an educational or tax-exempt organization, the refinanced loan may also be considered as having been made by a qualified lender. In order to qualify, it must have been made in connection with a program designed to encourage students to serve in occupations or areas with unmet needs, and the services required must be performed under the direction of a governmental unit or tax-exempt 501(c)(3) organization. |
| Income Limits | There are no specific income limits restricting the use of this provision. |
For more information on forgiveness of student loans, see chapter 12, Other income.
Tuition and fees deduction
The availability of the tuition and fees deduction expired at the end of 2016. Although Congress had previously extended this deduction after it expired in prior tax years, no such legislation to extend it again had been passed as of the time this book went to press. The discussion of this deduction is included in this chapter in case Congress acts to extend it. For updated information on this and any other tax law changes that occur after this book was published, see our website, ey.com/EYTaxGuide.
| Benefit |
Certain taxpayers are eligible to deduct up to $4,000 paid for qualified tuition and related expenses. The deduction is an adjustment to gross income (“above-the-line”) and is available even if you do not itemize deductions on Schedule A. The deduction for qualified tuition and fees are limited to those qualifying expenses paid during 2017 for 2017 enrollment periods, including any academic period that begins in 2017 or in the first three months of 2018. |
| Qualifications | Qualified tuition and related expenses are tuition and fees paid for you, your spouse, or a dependent for whom you claim an exemption. If your dependent pays qualified education expenses and you can claim an exemption for your dependent on your tax return, no one can take a tuition and fees deduction for those expenses. Neither you nor your dependent can deduct the expenses. This rule applies even if you do not claim an exemption for your dependent on your tax return. The expenses must be required for enrollment or attendance at an “eligible educational institution.” A college, university, vocational school, or other postsecondary educational institution, which is eligible to par ticipate in a student aid program administered by the Department of Education generally will be considered an eligible educational expense. Student activity fees and fees for course related books, supplies, and equipment generally do not qualify unless they are paid to the education institution as a condition of enrollment or attendance. The cost of insurance, medical expenses, room and board, transportation, and similar personal expenses are not considered qualified tuition and related expenses even if paid to the institution as a condition of enrollment or attendance. The amount of qualified tuition and related expenses must be reduced by certain scholarships, educational assistance allowances, and other amounts paid for the benefit of such individual, and by the amount of such expenses taken into account for purposes of determining any exclusion from gross income of: (1) income from certain U.S. savings bonds used to pay higher education tuition and fees; and (2) income from a Coverdell education savings account. Additionally, such expenses must be reduced by the earnings portion (but not the return of principal) of distributions from a Section 529 qualified tuition program. |
| Income Limits |
For 2017, you can deduct up to $4,000 if you are a qualifying taxpayer and your modified adjusted gross income is not more than $65,000, or $135,000 on a joint return. If your modified AGI is more than these amounts but not more than $80,000 ($165,000 for a joint return), you can deduct up to $2,000. These are absolute limits, not phaseouts. If your income is above those amounts, you cannot take any deduction. The deduction is also unavailable—regardless of your MAGI—if your filing status for 2017 is married filing separately or you can be claimed as a dependent on the tax return of another person. (You cannot take the deduction even if that other person does not actually claim you as a dependent.) Also, you cannot claim a deduction if you claimed an American opportunity or lifetime learning credit for the same student. Taxpayers should determine whether deducting qualified tuition and expenses produces a greater net reduction in tax liability than the American opportunity tax credit or lifetime learning credit and utilize the more favorable option. |
For more information on the tuition and fees deduction, see chapter 19, Education-related adjustments.
Tax-free scholarships and fellowships
In general, scholarships and fellowships received to assist an individual with payment of educational expenses are not considered taxable income. See the chart below for more details.
| Benefit | A candidate for a degree at an educational institution can exclude from income amounts received as a qualified scholarship or fellowship. |
| Qualifications | A candidate for a degree includes a student who:
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A scholarship or fellowship grant is generally an amount paid for the benefit of an individual to aid such individual in the pursuit of study or research. A scholarship or fellowship grant does not include any amount provided by an individual to aid a relative, friend, or other individual if the grantor is motivated by family or philanthropic considerations. Amounts received that are used for qualified tuition and related expenses can be excluded from income. These expenses include tuition and fees required to enroll in, or to attend, an educational institution, and fees, books, supplies, and equipment required of all students in your course of instruction. Incidental expenses, including room and board and travel expenses, do not qualify. Although scholarships are usually taxable if they carry a future service requirement, qualified amounts received under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program will not be taxed. |
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| Income Limits | There are no specific income limits restricting the use of this provision. |
For more information on scholarships and fellowships, see chapter 12, Other income, and IRS Pub. 970.
Withdrawals from IRAs before age 59½ to pay qualified higher educational expenses
| Benefit | Generally, withdrawals from a traditional or Roth IRA before age 59½ are subject to an additional 10% tax on the part of the distribution included in gross income. You will not be subject to the 10% additional tax, however, if for the year of withdrawal you have paid sufficient higher education expenses for yourself, your spouse, or for your or your spouse’s children or grandchildren. |
| Qualifications | N/A |
| Income Limits | There are no specific income limits restricting the use of this provision. |
Education savings bond program
| Benefit | Interest earned on U.S. savings bonds is generally taxed either in the year the interest is earned or, more typically, in the year in which you cash in the bonds. Under the education savings bond program, when you cash in qualified U.S. savings bonds, you may be able to exclude from your income all or a portion of the interest earned. |
| Qualifications | Only Series EE bonds issued after 1989 and Series I savings bonds qualify. In addition, the owner of the bond must be at least 24 years old before the bond’s issue date, and cannot have a filing status of married filing separately. To be able to exclude interest from your taxable income, you must pay “qualified higher education expenses” for yourself, your spouse, or a dependent for whom you claim an exemption on your return. If the total that you receive when you cash in the bonds is not more than the available qualified expenses, part of the interest may be tax free. |
| Income Limits | The interest exclusion is phased out for higher income taxpayers. The phaseout range for single taxpayers in 2017 is $78,150 to $93,150. For taxpayers filing joint returns, the phaseout range is $117,250 to $147,250. |
For more information on the education savings bond programs, see chapter 7, Interest income.
Educational assistance as a working condition fringe benefit
| Benefit | Certain educational expenses paid by your employer may be excludable from your income if the expenditures are considered a working condition fringe benefit. |
| Qualifications | Expenses qualify if the education you receive maintains or improves skills required in your employment or meets the express requirements of your employer or applicable law required as a condition of employment. Educational expenses that are incurred to meet minimum educational requirements or that qualify you for a new trade or business (such as a law or medical degree) do not qualify. Amounts paid by your employer will generally qualify as a working condition fringe benefit if the item would have been deductible as an employee business expense had you paid the expense. Treatment as a working condition fringe benefit is generally more beneficial than a deduction, however, since employee business expenses are deductible only if you itemize your deductions, and then only to the extent that they, in combination with other miscellaneous itemized deductions, exceed 2% of your adjusted gross income. |
| Income Limits | There are no specific income limits restricting the use of this provision. |
For more information about working condition fringe benefits, see Pub. 15-B.
Employer-provided educational assistance programs
Your employer may assist you with educational payments, a portion of which may be excludable from your income (see chart below). Qualified payments include payments for tuition, fees, books, supplies, and equipment (not including meals and transportation). Courses in sports, games, or hobbies are not qualified expenses unless there is a reasonable relationship between the courses and the business of the employer or if the courses are required as part of a degree program.
| Benefit | Up to $5,250 of employer-provided education assistance payments may be excluded from your income each calendar year when provided under an employer-sponsored educational assistance program. Qualifying payments are excludable from income whether or not the courses taken are job related. This benefit covers educational assistance for undergraduate or graduate level courses. |
| Qualifications | Payments must be made under a qualifying written plan that does not discriminate in favor of highly compensated employees. Payments may be made for tuition, fees, books, supplies, and equipment. Payments made for meals, lodging, and transportation generally do not qualify. |
| Income Limits | There are no specific income limits restricting the use of this provision. |
For more information on education as a working condition fringe benefit and on employer-provided educational assistance programs, see chapter 12, Other income, and chapter 28, Tax benefits for work-related education.
Coverdell education savings accounts
| Benefit | There is no federal income tax on earnings in Coverdell education savings accounts when distributions are used to pay qualifying educational expenses. |
| Qualifications | Qualified educational expenses include tuition, fees, books, supplies, and equipment, and costs of room and board. Qualified expenses include elementary and secondary school expenses. The purchase of computer equipment, Internet access, and related technology, if used by the student or the student’s family, also qualifies. There is no federal income tax deduction for contributions to Coverdell accounts. Except in the case of a special needs beneficiary, you cannot contribute to a Coverdell account after the beneficiary reaches age 18. To the extent that distributions are not used for qualifying educational expenses, an income and penalty tax may apply to the distributed earnings. |
| Income Limits | The maximum contribution to a Coverdell account is $2,000 per year. The amount that a taxpayer is allowed to contribute to a Coverdell account is phased out for higher income taxpayers. In 2017 for joint returns, the phaseout range is $190,000 to $220,000. For other taxpayers, the phaseout range is $95,000 to $110,000. |
Qualified tuition (Section 529) programs
A qualified tuition program allows you to prepay or contribute to an account that has been established to pay qualified higher education expenses. Unlike Coverdell education savings accounts, there are no income limits restricting the use of these accounts. Although contributions are not deductible for federal income tax purposes, many states permit you to deduct a portion or all of your contribution on your state income tax return.
| Benefit | There is no federal income tax imposed when distributions from qualified tuition programs (popularly known as 529 plans) are used to pay qualifying higher education expenses. |
| Qualifications | There are two basic types of 529 plans. Under the prepaid educational service–type plan, you purchase tuition credits today for use in the future. The other type of plan (often referred to as “college savings plan”) permits you to contribute to a special higher education savings account for a designated beneficiary. In both types of plans, your initial investment is designed to grow over time and the value of that growth is not subject to federal income tax when distributions are made for qualifying higher education expenses. There is no federal income tax deduction for contributions to a 529 plan. Unlike distributions from Coverdell accounts, qualifying expenditures may only be made for higher education expenses. To the extent that distributions are not used for qualifying higher educational expenses, an income and penalty tax may apply. Higher educational expenses include tuition, required fees, books, and supplies. Amounts paid for computer technology and equipment, as well as Internet access, are also qualified expenses if used primarily by the student enrolled at an eligible educational institution. For someone who is at least a half-time student, room and board are qualifying higher educational expenses. |
| Income Limits | 529 plans are not subject to income limits and permit you to make contributions far in excess of the $2,000 annual contribution permitted for Coverdell accounts. The combination of benefits and flexibility offered by these plans make them the most widely used education tax incentive program. Be sure to discuss the investment options and limitations of the various programs with your financial advisor. |
For more information on qualified tuition programs, Coverdell education savings accounts, and other education incentives, see Publication 970, Tax Benefits for Education.