- Educational expenses are nondeductible unless the Internal Revenue Code provides a deduction or credit.
- Education credits may not be claimed by a taxpayer if someone else claims the taxpayer as a dependent.
- Taxpayers may not obtain a double benefit from education expenditures. For example, you may not claim a credit or deduction for expenditures paid with scholarships or other tax-free funds.
- Educational expenses may qualify as business expenses if they are related to current employment and do not qualify the taxpayer for another job or profession.
- A deduction is available for qualified higher education tuition and related expenses incurred at eligible post-secondary institutions even if the taxpayer does not itemize deductions.
But only through 2016, unless extended by Congress.
The maximum annual deduction is $4,000.
- Employees may be able to deduct unreimbursed job-related education expenses if they itemize deductions. Expenses for entering a new line of work are not deductible.
- Taxpayers may be able to deduct up to $2,500 of student loan interest even if they do not itemize deductions.
- The American Opportunity Tax Credit applies to an eligible student’s first four years at an eligible college or vocational school leading to a degree or other recognized education credential. The maximum annual credit is $2,500 per eligible student.
- The Lifetime Learning Credit applies to a broader range of students because all years of post-secondary education are eligible. The maximum annual credit is $2,000 per tax return regardless of how many students qualify.
- Taxpayers may avoid the 10% early withdrawal penalty on IRA withdrawals before the owner reaches age 59 ½ if used for qualified higher education expenses. Withdrawals are still subject to ordinary income tax.
- Qualified tuition programs (a.k.a. 529 plans) permit tax-free distributions if used for qualified educational expenses.
- Coverdell Education Savings Accounts allow tax-free distributions if funds are used for qualified education expenses, and can be used for K-12 education costs in addition to college expenses.
- Most tax provisions become limited or unavailable at certain income thresholds and/or are subject to other specific limitations.
- The devil is in the details. Pay close attention to qualification requirements for eligible expenses, institutions and students.
- Taxpayers may not claim education credits and the tuition and fees deduction for the same student in a particular tax year.
- Beginning in 2016 students typically must retain Form 1098-T Tuition Statement provided by the educational institution.
- Consult IRS Publication 970, Tax Benefits for Education, for detailed guidance. https://www.irs.gov/pub/irs-pdf/p970.pdf