What Are Qualified Educational Expenses?

Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. There are different qualified educational expenses depending upon the level of schooling the student is at.

Detailed below are the common qualified educational expenses for elementary, secondary, and post-secondary students. Of course, certain circumstances may change the information presented below, so be sure to contact your tax professionals at Bilsky Financial to address your personal situation.

 

Expense

 

Coverdell ESA

 

529 Plan

American Opportunity Credit Lifetime Learning Credit
Elementary and Secondary Expenses
Tuition Yes Up to $10,000 No No
Fees Yes No No No
Room and Board Yes No No No
Uniforms Yes No No No
Transportation Yes No No No
Post-Secondary Expenses
Tuition Yes Yes Yes Yes
Fees Yes Yes Yes Yes
Books Yes Yes Yes Yes
Room and Board If > than half-time If > than half-time No No
Insurance No No No No
Medical Expenses No No No No
Living Expenses No No No No
Transportation No No No No

Elementary and Secondary (Middle/High School) Expenses:

What are Qualified Educational Expenses?

  • Tuition (Coverdell ESA & 529)
  • Fees (Coverdell ESA)
  • Room and Board (Coverdell ESA)
  • Uniforms (Coverdell ESA)
  • Transportation (Coverdell ESA)

Important Note:

An important thing to remember is that these expenses do not count toward after school programs that act like daycare. Those items are reported separately on the return.

Post-Secondary School (College) Expenses:

College expenses differ from the expenses that you can deduct for elementary and secondary school. There are more restrictions on the expenses that qualify as educational expenses, but you now can claim tax credits, which will reduce the taxes you owe more than a deduction would

What are Qualified Educational Expenses?

  • Tuition
  • Fees
  • Other expenses that all students are required to pay
  • Books and supplies that are needed for class are only used for calculating the American Opportunity Tax Credit

What are not Qualified Educational Expenses?

  • Room and Board (even if you are living on campus)
  • Groceries or other living expense
  • Medical expenses while attending college
  • All other expenses that are not listed in as acceptable qualified educational expenses

When do Educational Expenses effect your tax return?

  • If you receive scholarship money and/or grants
  • If you are trying to claim any of the higher education tax credits

Scholarships:

Money that you receive from scholarships can be considered taxable income, only if the amount you receive is greater than your educational expenses. This information is communicated through the form 1098-T. Universities will prepare this information for each student. The qualified educational expenses are listed in box 2. Scholarship amounts are listed in box 5. When box 5 is greater than box 2, you will include the different as income on your tax return.

For example, if I had $10,000 listed as qualified tuition and related expenses (box 2), and I had $15,000 listed as my scholarships or grants (box 5). Since $15,000 is greater than $10,000 by $5,000, I would include $5,000 in my taxable income on my individual income tax return.

Educational Tax Credits:

Congress has allowed two credits that can offset your income tax owed. These credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

American Opportunity Tax Credit:

The AOTC is a credit available for students that have not finished 4 years of higher education, claimed the credit more than 4 times, have no felony drug convictions, and who are at least enrolled half time during the year. The credit has a maximum amount of $2,500. There is a 100% credit on the first $2,000 of qualified educational expenses and then there is a 25% credit on the next $2,000 of qualified educational expenses.

For example, if I had $3,000 of qualified educational expenses, my credit would be $2,250. You get this amount by doing the following. (1*2000) + (.25*1000). 1*2000 represents the 100% of the first 2,000 of expenses and the (.25*1000) is the 25% of the additional amount.

For example, if I had $4,000 or greater of qualified expenses, I would receive the full credit of $2,500.

Lifetime Learning Credit:

The LLC is different from the AOTC. The LLC is available to all students and can be used any year, there is no restriction on amount of years you can use the LLC. Using this credit does take more educational expenses because you can only claim 20% of the first $10,000. The maximum credit is lower with an amount of $2,000.

For example, I have $8,000 of educational expenses. My credit would be $1,600 because you would do the following calculation. .2 * 8000

Overall, educational expenses can have an impact on the amount of taxes you owe and should be something that your family plans for if there is a member heading to college in the near future.