The IRS offers a variety of deductions and credits for students and adults who attend a school. But which education expenses qualify depends on what the IRS recognizes as essential and necessary.
Taxpayers can only claim education expenses if they are associated with an eligible education institution.
Eligible Education Institution
An eligible educational institution provides education levels beyond high school.
That can include any university, college, trade school, community college, or other post-secondary institution. Most accredited educational institutions qualify, regardless of whether they are public, non-profit, or privately-owned-for-profit.
Also, the organization must be eligible to participate in the US Dept of Education student aid program.
Ask your school or check the Department of Education website to determine if your school qualifies as an eligible institution.
Qualified Education Expenses
The IRS recognizes education expenses as the amounts paid for:
- Related costs required for student attendance or enrollment
Covered expenses can also include:
- Student activity fees that you must pay to attend or enroll in school
Education expenses qualify if you paid for them during that academic period to an eligible educational institution. An academic period must be the tax year or within the initial three months during the next tax year.
Non-qualifying Education Expenses
Even if you spent money on the following expenses, the IRS does not permit these non-qualified payments:
- Student insurance
- Meal plans
- Dorm room and board
- Off-campus living expenses
- Medical costs and student health fees
- Living expenses
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit permits up to a maximum annual credit of up to $2,500 for each eligible student. It covers qualified expenses for higher education during the first four years. The student must pursue a degree and be enrolled for at least half-time hours.
The AOTC is a partially refundable credit. If using the credit brings your tax bill down to zero, up to 40% of the remainder can be refunded. The refund maximum is $1,000.
Also, the AOTC only permits usage for the cost of supplies, books, and equipment. All items must be required for a course. However, you do not have to pay the amounts directly to the school. You can claim expenses paid to an off-campus book or supply store.
Some income limits may apply. Students with a history of drug convictions or felonies are not eligible for the AOTC.
Lifetime Learning Credit (LLC)
Different from the AOTC, the Lifetime Learning Credit is not limited to the first four years of higher education.
Taxpayers can apply the LLC to undergraduate, graduate, and professional degrees. Also, you can use it for courses to acquire or improve job skills. The LLC does not require the student to pursue a degree or education credential.
The LLC offers up to $2,000 credit per tax return (not per student). Fortunately, they do not put a limit on how many years you may claim the credit. On the other hand, the LLC is not refundable, but the AOTC is.
Also worth noting, taxpayers who file married but separately cannot qualify for either the LLC or the AOTC benefits.
Students with drug or felony histories are permitted to claim the LLC.
Do You Have Qualifying Education Expenses?
The IRS provides a handy interactive tool to find out which education expenses you have.
Make sure you have your information ready when determining your qualifying education expenses:
- filing status
- student enrollment status
- your adjusted gross income (AGI)
- list of expenses
- how the costs were paid, like with qualified tuition programs or payments from other tax-favored accounts.
Also, the IRS specified who is allowed to pay for qualifying education expenses. They accept claims if you and your spouse filed a return jointly, a student claimed on your return as a dependent, or outside parties like relatives and friend.
They accept claims for cash, check, debit card, credit card, or loan funds for qualified education expenses. However, if you pay using loan money, you can only claim the credit during the year you paid the fees. Do not claim the year you received the loan or year you paid off the loan.
Should You Claim Qualifying Education Expenses?
Before you claim the education credits, make sure you and your expenses qualify. Always save copies of any documents used to support your tax claims.
If audited without proper documentation, the IRS may require you to pay back the credit. Worse, you could face additional fraud or accuracy penalties.
For more help understanding tax credits and qualifying education expenses, reach out to the IRS hotline or a qualified tax advisor like a CPA or Enrolled Agent (EA).