Education Benefits Self-Study Course: (2 Tax Law CE Hours)

Education Benefits
Self-Study Course
(2 Tax Law CE Hours)
Study Material
Copyright © 2019 – 3IS, Inc. dba (3IS Tax School / 3IS Tax Services) – All Rights Reserved
Education Benefits
Description
The Education Benefits topic covers the American Opportunity Tax Credit (AOTC), the
Lifetime Learning Credit, and the Student Loan Interest deduction. Each has different
qualifications to claim the credit and different tax benefits. This topic also covers the
education tax benefits of tax-advantaged education savings accounts (Coverdell ESA,
Qualified Tuition Program, Education Saving Bond Program) as well as details on educational
assistance benefits provided by employers, as well as a discussion on Forgivable Student
Loans.
Learning Objectives
Upon completion of this topic, the student to be able to determine which education benefit
or adjustment is available to the taxpayer that will maximize the tax benefit and result in the
lowest tax. It is the further objective for the student to be able to understand how to treat,
report and account for additional education tax benefits (notably education savings
accounts) available to taxpayers. The tax benefits available for education are different
whether the taxpayer is currently attending college, saving for college or having to make
student loan payments.
Credits and Deductions

What is a tax credit?
A tax credit is deducted from the tax after it has been figured from the taxpayer’s taxable
income. A tax credit is more valuable to the taxpayer than a tax deduction. Why? A tax credit
saves the taxpayer a dollar of tax for each dollar of credit. On the other hand, a deduction
reduces the taxpayer’s taxable income. If a taxpayer is in the 25% tax bracket, a tax deduction
saves approximately 25 cents in tax for each dollar of deduction compared to a dollar for
dollar tax saving from a tax credit.
Taxpayers have two education credits available, the American Opportunity Credit and the
Lifetime Learning Credit. The credits are for payments made to eligible institutions for post-
secondary education. The credits are nonrefundable (Lifetime Learning Credit) or partly
nonrefundable and partly refundable (American Opportunity Credit). These two education
credits are available by completing Form 8863. The Student Loan Interest deduction is not a
credit but is an adjustment to income.
Credits are subtracted from the taxpayer’s tax (nonrefundable). If the credit is more than the
taxpayer’s tax, the excess is refunded (refundable). Adjustments lower the taxpayer’s
adjusted gross income which lowers the income subject to tax.
What is a tax deduction?
A tax deduction is subtracted from gross or adjusted gross income in calculating the taxable
income and in figuring the tax.
A tax credit is deducted from the tax after it has been figured from the taxpayer’s taxable
income. As noted previously, a tax deduction is not as valuable to the taxpayer as a tax credit.
The American Opportunity Tax Credit (AOTC)

The Tax Cuts and Jobs Act did not change the American Opportunity Tax Credit.
The American Opportunity Tax Credit is available for the first 4 years of post-secondary
education. The maximum yearly tax credit available is $2,500 per student. It is both a partially
nonrefundable and partially refundable credit. The amount of the credit is determined by
the amount paid for qualified tuition and related expenses for eligible students and the
amount of the taxpayer’s adjusted gross income. The credit is taken on form 8863. There
may be more than one eligible student in a family. Part III of Form 8863 is for each student
being claimed.
Calculating the Credit

The credit is equal to 100% of the first $2,000 plus 25% of the next $2,000 of qualified
education expenses (defined later in this chapter).
Up to 40% of the American Opportunity Tax Credit can be a refundable credit. The maximum
refundable AOTC credit is $1,000.
The AOTC credit is phased out or reduced if the taxpayer’s modified adjusted gross income
(MAGI) is between $80,000 and $90,000 for single filers ($160,000 and $180,000 for a married
couple filing jointly). The credit is completely phased out for taxpayer’s whose MAGI is above
$90,000 (single filers) or above $180,000 (married couple filing jointly).
Claiming the Credit

The American Opportunity Tax Credit can be claimed if all the following findings can be
made:
1. The student is the taxpayer, the spouse or is listed as a dependent

2. The student’s qualified education expenses are paid by the taxpayer. NOTE: If the
qualified education expenses are paid by the taxpayer’ dependent or are paid by a
third party (such as a grandparent), the expenses are considered paid by the
taxpayer.
3. The education expenses are paid for post-secondary education.
The American Opportunity Tax Credit cannot be claimed if:
1. The taxpayer’s filing status is Married Filing Separately
2. The student or the taxpayer does not have a Social Security Number or Individual
Taxpayer Identification Number obtained before the due date of the tax return
3. The taxpayer or spouse is a nonresident alien and did not choose for tax filing
purposes to be treated as a resident alien
4. The taxpayer claiming the credit is listed as a dependent on another taxpayer’s return
(for example, his/her parents)
5. Another education benefit is being claimed by the taxpayer for the same student
Example 1. Sandra was able to claim the American opportunity credit for 2015, 2016, 2017,
and 2018. Sandra’s parents claimed the American opportunity credit on their 2015, 2016,
and 2017 tax returns. Sandra filed her return for 2018 and claimed the American opportunity
credit. Because the American opportunity credit and Hope scholarship credit have been
claimed for Sandra for 4 tax years before 2019, the American opportunity credit can't be
claimed for Sandra for 2019. If Sandra were to file Form 8863 for 2019, she would check “Yes”
for Part III, line 23. She would be eligible to claim only the Lifetime Learning credit.
Example 2. Thomas was eligible to claim the American Opportunity credit for 2015, 2016,
2017, and 2018. His parents claimed the American Opportunity credit for him on their tax
returns for 2015, 2016, and 2017. The credit was not claimed for another tax year. Since the
American Opportunity credit has been claimed for only 3 tax years before 2019, Thomas
meets the second requirement to be eligible for the American Opportunity credit. If he were
to file Form 8863 for 2019, he would check “No” for Part III, line 23. If all other requirements
are met, the student is eligible for the American Opportunity credit.
Example 3. Samantha enrolls in a degree program as a full-time student for the 2020 spring
semester, beginning January 2020. In December 2019, she paid her tuition for the spring
semester. Samantha is eligible to claim an American Opportunity Credit for 2019 because
the tuition paid in 2019 relates to an academic period that begins in the first 3 months of
2020. Her eligibility to claim an American Opportunity credit in 2019 is determined as if the
2020 spring semester began in 2019. As a result, Samantha satisfies the third requirement
to claim the credit.
Qualifying Expenses
The amount of the American Opportunity Tax Credit available is based on the qualifying
education expenses paid by the taxpayer for the eligible student. Generally, the credit is
allowed for qualified education expenses paid in the tax year for an academic period
beginning in the tax year or beginning in the first 3 months of the following year.
An academic period can be a semester, trimester, quarter or other period (such as a summer
school session) as determined by the institution. If an institution uses credit hours and does
not use academic periods each payment period is regarded as an academic period.
Qualified Education Expenses
Qualified education expenses are tuition and related expenses (books, supplies and
equipment needed for a course of study). Course related items do not need to be purchased
from the institution to qualify but taxpayers are expected to provide a record of payment to
support the expensing of those purchases.
Health service fees, insurance, transportation and room and board are not qualified
expenses. Student activity fees are qualified expenses only if the fees are a condition of
enrollment.
Example. Christina enrolled in College of the Canyons for her freshman year. She was
required to pay a separate student activity fee in addition to her tuition. All students are
required to pay the activity fee. The funds are used to fund on-campus organizations and
activities run by students, such as the student newspaper and the student government. No
portion of the fee covers personal expenses. Because the fee is required for enrollment and
attendance at College of the Canyons, it is a qualified expense even though it is labeled a
student activity fee.
An eligible institution is an accredited college, university, vocational school, or other post-

secondary educational institution. Certain institutions outside the United States may also be
eligible if they are eligible to participate in a student aid program administered by the
Department of Education.
Education credits are no longer allowed unless the student receives a Form 1098-T from the
eligible educational institution. However, if the student does not receive a Form 1098-T
(either because the institution is not required to provide one or the student did not receive
one before filing) the student may claim the credit if he or she can demonstrate he or she
was enrolled at an eligible education institution.
Example 1. John is in his junior year in USC’s degree program in dentistry. In addition to
tuition, he is required this year to pay a fee for the rental of dental equipment he will be
using in the program to the university. John’s equipment rental fee is a qualified educational
expense because the equipment rental is necessary for his course of study.
Example 2. Henry and Theresa are first-year students at Georgetown University. In their
mandatory first-year classes, they are required to purchase certain books and other reading
materials. No policy is in place by Georgetown about how these materials should be obtained
but if students purchase them from the university bookstore, they will receive a bill from the
school. While Henry bought his books from a friend and Grace bought hers at the bookstore,
both can treat the purchases as qualified education expenses for the American Opportunity
credit.
Adjustments to Qualified Education Expenses
Taxpayers cannot claim qualified education expenses if the expenses are paid with tax free
educational assistance such as tax-free parts of scholarships or fellowships, Pell grants,
employer-provided educational assistance, veterans educational assistance or other tax-free
payments.
Scholarship or fellowships are generally treated as tax free. The student may be required to
file a tax return if the scholarship or fellowship either must be or may be applied to room
and board (not a qualified expense) and is required to be included in the student’s gross
income.
Qualified education expenses are not adjusted by amounts the student receives as a loan, a
gift, an inheritance, wages or moneys withdrawn from personal savings.
Example 1. Rita paid $4,000 for tuition and $6,000 for room and board at State University.
No other fees were required for enrollment or classroom attendance. Rita received a $3,000
scholarship and obtained a $5,000 student loan to help pay these costs. The scholarship can
be used to pay any of Rita’s college expenses under its terms. The $3,000 scholarship is
applied by State University against Rita’s $10,000 bill. The $7,000 balance is paid by the
$5,000 student loan and $2,000 from her savings. To calculate the amount of either the
American Opportunity or Lifetime Learning education credit. Rita must reduce her qualified
education expenses by the amount of the scholarship ($3,000) because the entire
scholarship has been excluded from her income. She does not have to reduce her qualified
expenses by any part of the loan proceeds because the student loan is not tax-free
educational assistance. Rita is treated as having paid $1,000 in qualified education expenses
($4,000 tuition - $3,000 scholarship).
Example 2. The facts are the same as in Example 1, except Rita reports her scholarship as
income on her tax return. Because the $3,000 scholarship is reported as income, Rita does
not have to reduce her qualified education expenses and can treat the total tuition of $4,000
as a qualified education expense.
Example 3: Laurie’s son, George, graduated from high school in June and enrolled in college
for the fall semester. All the requirements to claim an American Opportunity credit have
been met. Laurie needs to determine the adjusted qualified education expenses for her son’s
college attendance to calculate the credit. George has $6,000 of qualified education
expenses and $3,000 of room and board. He was the recipient of a $5,500 Pell grant and
took out a $2,500 student loan to pay these expenses. Laurie paid the remaining $1,000 for
the Fall semester. Under its terms and conditions, a Pell grant may be used for any expenses
including room and board. If the Pell grant is applied to the qualified education expenses
(other than room and board), it will qualify as a tax-free scholarship. George will not include
any part of the Pell grant in gross income. After reducing qualified education expenses by
the tax-free scholarship, Laurie will have $500 ($6,000 – $5,500) in qualified education
expenses available to figure her credit.
Example 4. The facts are the same as in Example 1. If, unlike in Example 1, Laurie and George
choose to apply only $2,500 of the Pell grant to the qualified education expenses and to
apply the remaining $3,000 to room and board, only $2,500 will qualify as a tax-free
scholarship. George will be required to include the $3,000 applied to room and board in
gross income, and it will be treated as earned income for purposes of determining whether
he is required to file a tax return. If the $3,000 is George’s only income, he will be below the
filing threshold and will not be required to file a tax return. After the qualified education
expenses have been reduced by the tax-free scholarship, Laurie will have $3,500 ($6,000 –
$2,500) of adjusted qualified education expenses available to figure her tax credit.
As shown in these examples, how the tax-free portion of a Pell grant is applied to education
expenses will determine the qualified education expenses available to figure the education
tax credit. Since room and board is not a qualified education expense and since the Pell grant
can be used to offset the cost of room and board, taxpayers benefit from using the tax-free
Pell grant to offset the cost of room and board first.
Who Is an Eligible Student?

To be eligible, a student must meet the following requirements:
1. The student had not completed 4 years of post-secondary education before the
beginning of the current tax year.
2. The student was enrolled at least half time for at least one academic period during
the current tax year in a program leading to a degree, certificate or recognized
credential.
3. The student did not include in the current tax year expenses that were used to figure
the AOTC in any 4 previous tax years.
4. The student did not have a federal or state felony drug conviction.
Example 1. Melissa graduated from high school in June 2019. She enrolled in an
undergraduate degree program at State University in September. She attended full-time for
both the 2019 Fall and 2020 Spring semesters. For the 2019 Fall semester, Melissa was
enrolled less than half-time. Because Melissa was enrolled in an undergraduate degree
program on at least a half-time basis for at least one academic period that began during
2019 and at least one academic period that began during 2020, she is an eligible student for
tax years 2019 and 2020 (including the 2019 Fall semester when he enrolled at State
University on less than a half-time basis).
Example 2. Diane graduated from high school in June 2018. Diane enrolled in a 1-year
postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent
starting in January 2019. She completed the program in December 2019 and was awarded a
certificate. In January 2020, to obtain a certificate as a computer programmer, she enrolled
in a 1-year postsecondary certificate program on a full-time basis. Because she meets the
necessary requirements of degree, workload and year of study, Diane is an eligible student
for both tax years 2019 and 2020.
Expenses paid by others. An eligible student’s qualified education expenses can be paid
directly to an eligible educational institution by a relative or former spouse. In that event, the
student is treated as having received the payment from the third party and having made the
payment to the institution. The taxpayer who claims the student as a dependent is then
considered to have made the payment for the student’s qualified educational expenses and
is eligible to take the credit.
Example. In 2019, Michael’s qualified educational expenses are paid directly to an eligible
educational institution by his grandmother. Michael is treated as having received the money
and having paid the qualified educational expenses himself in claiming the American
Opportunity credit. If Michael is a dependent on another’s tax return (such as his parent’s)
whoever claims him can use the qualified expenses to claim an American Opportunity credit
and Michael cannot claim the credit. If Michael is not a dependent on another’s tax return,
only he can use the payment to claim the American Opportunity credit.

The American Opportunity Credit can be claimed for each eligible student. The maximum
credit is available for payments of at least $4,000 in qualified education expenses for each
eligible student. The maximum credit for 2018 is $2,500.
Example. The Chrysler’s are married and file a joint tax return. They claim their dependent
daughter on their tax return for tax year 2019. Their MAGI is $72,000. Their daughter is in
her junior (third) year of studies at the local university. The parents paid qualified education
expenses of $4,400 in 2019. The parents, their daughter, and the local university meet all the
requirements for the American Opportunity credit. On their 2019 tax return, the couple can
claim a $2,500 American Opportunity credit calculated as 100% of the first $2,000 of qualified
education expenses, plus 25% of the next $2,000.
Phaseout
The American Opportunity credit is gradually reduced depending on the modified adjusted
gross income (MAGI) of the taxpayer claiming the credit. If the taxpayer’s MAGI is between
$80,000 and $90,000 ($160,000 and $180,000 if you file a joint return) the credit is reduced.
If the taxpayer’s MAGI is $90,000 or more ($180,000 or more if you file a joint return) the
credit is not available.
Example. A couple filing jointly have a MAGI of $165,000. They paid $6,000 of qualified
education expenses in tax year 2019. They have calculated a tentative American opportunity
credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the
next $2,000 of qualified education expenses). However, because their MAGI is within the
range of incomes where the credit must be reduced, their tentative credit ($2,500) must be
reduced fractionally. The upper MAGI limit for a married couple filing a joint return is
$180,000. The numerator (top number) is $180,000 minus their MAGI of $165,000, or
$15,000. The denominator (bottom number) is $20,000 or the phaseout range of incomes
between $160,000 and $180,000. The amount of their available American Opportunity credit
is $15,000/$20,000 multiplied by $2,500 or $1,875. Their MAGI phase out reduction in the
credit is $625 ($2,500-$1,875).
PATH Act
The PATH Act (Protecting Americans from Tax Hikes) was passed in December 2015.
Following are the provision of the sections of the act pertaining to the American Opportunity
tax credit and to Form 1098.
The PATH Act made the American Opportunity Tax Credit permanent. The AOTC took the
previous permanent provisions of the Hope Scholarship Credit ($1,800 credit for tuition and
related expenses for the first two years of post-secondary education) and increased the
credit to $2,500 for each of four years of post-secondary education.
The PATH Act also requires an employee identification number (EIN) of the educational
institution to be eligible to take the credit. Beginning with tax years after December 31, 2015,
a taxpayer claiming qualified payments for the AOTC must provide the EIN of the educational
institution to which the payments were made. The EIN is reported to the taxpayer on form
1098-T.
The PATH Act reforms the reporting requirements for Form 1098-T. Educational institutions
are required to report only qualified tuition and related expenses paid as opposed to the
previous law where the institution had to choose between amounts paid and amounts billed.
AOTC Summary
The AOTC is claimed for qualified expenses paid by the taxpayer for a dependent’s post-
secondary education. 100% of the first $2,000 and 25% of the next $2,000, or a total of $2,500
can be claimed. The AOTC is both a nonrefundable and refundable credit. The refundable
portion is 40% of the qualified expenses claimed up to a maximum of $1,000. Qualified
expenses are for tuition, books, supplies and equipment for the course of study. If the
dependent’s expenses are paid by a third party (such as a grandparent) they are considered
paid by the taxpayer. The credit can be claimed only if the eligible student receives a form
1098-T from the post-secondary institution or can demonstrate having attended a qualified
institution when a 1098_T cannot be provided. The eligible student must be enrolled at least
half time for at least one academic period in a program leading to a degree, credential or
certificate from a qualified post-secondary institution and must not have completed 4 years
of post-secondary education to qualify for the credit in the current tax year. Students with a
felony drug conviction are disqualified from taking the credit. The credit cannot be claimed
by a taxpayer filing as married filing separately. The credit may be reduced or phased out at
higher taxpayer incomes.
The Lifetime Learning Credit

The Tax Cuts and Jobs Act did not change the Lifetime Learning Credit.
The American Opportunity Tax Credit is available for the first 4 years of post-secondary
education. The maximum yearly tax credit available is $2,500 per student. It is both a partially
nonrefundable and partially refundable credit. The amount of the AOTC credit is determined
by the amount paid for qualified tuition and related expenses for eligible students and the
amount of the taxpayer’s adjusted gross income. The credit is taken on form 8863. There
may be more than one eligible student in a family. Part III of Form 8863 is for each student
being claimed.
The Lifetime Learning Credit is a nonrefundable credit of up to $2,000 for qualified education
expenses paid for eligible students. There is no limit on the number of years the Lifetime
Learning Credit can be claimed. The Lifetime Learning Credit is a per taxpayer credit, not a
per student credit. In other words, the maximum credit of up to $2,000 is the same
regardless of the number of students in the household. As a nonrefundable credit, the
Lifetime Learning Credit reduces the income tax to be paid. If the credit is more than the tax
owed, the excess is not refunded to the taxpayer. The credit is also taken on Form 8863.

The Lifetime Learning Credit is calculated by taking 20% of the taxpayer’s qualified
educational expenses up to the first $10,000 on a per tax return basis. The maximum claim
per tax return is $2,000 (20% of $10,000).
As with the American Opportunity Tax Credit, The Lifetime Learning Credit also has a phase
out range. The Lifetime Learning Credit is reduced when the taxpayer’s MAGI is between
$58,000 and $68,000 for single filers ($116,000 and $136,000 for a married couple filing
jointly). This credit is completely phased out for taxpayer’s whose MAGI is above $68,000
(single filers) or above $136,000 (married couple filing jointly).
Example. Pam and Arthur Henderson are married and file a joint tax return. Their MAGI is
$75,000 for 2019. Mrs. Henderson is attending an eligible local college to earn credits toward
a degree in nursing. She has decided to pursue a career in nursing after having previously
completed a bachelor’s degree in sociology. In August 2019, Pam paid $4,500 of qualified
education expenses for her fall 2019 semester. The couple can claim a $900 (20% × $4,500)
Lifetime Learning credit on their 2019 joint tax return.
Claiming the Credit

The Lifetime Learning Credit can be claimed if all the following findings can be made:
1. The student is the taxpayer, the spouse or is listed as a dependent.
2. The student’s qualified education expenses are paid by the taxpayer. NOTE: Like the
AOTC, if the qualified education expenses are not paid by the taxpayer but are paid
by the taxpayer’s dependent or by a third party (such as a grandparent), the expenses
are considered paid by the taxpayer.
3. The education expenses are paid for post-secondary education.
The Lifetime Learning Credit cannot be claimed if:
1. The taxpayer’s filing status is Married Filing Separately

2. The student or the taxpayer does not have a Social Security Number or Individual
Taxpayer Identification Number
3. The taxpayer or spouse is a nonresident alien and did not choose for tax filing
purposes to be treated as a resident alien
4. The taxpayer claiming the credit is listed as a dependent on another taxpayer’s return
(for example, his/her parents)
5. Another education benefit is being claimed by the taxpayer for the same student
Qualifying Expenses
The amount of the Lifetime Learning Credit available is based on the qualifying education
expenses paid by the taxpayer for the eligible student. Generally, the credit is allowed for
qualified education expenses paid in the tax year for an academic period beginning in the
tax year or beginning in the first 3 months of the following year.

Qualified education expenses are tuition and related expenses (books, supplies and
equipment needed for a course of study). Course related items do not need to be purchased
from the institution to qualify but taxpayers are expected to provide a record of payment to
support the expensing of those purchases.
Health service fees, insurance, transportation and room and board are not qualified
expenses. Student activity fees are qualified expenses only if the fees are a condition of
enrollment.
An eligible institution is an accredited college, university, vocational school or other post-

secondary educational institution. Certain institutions outside the United States may also be
eligible if they are eligible to participate in a student aid program administered by the
Department of Education.
Education credits are no longer allowed unless the student receives a Form 1098-T from the
eligible educational institution.
The following examples are as relevant to the Lifetime Learning credit as they are to the
American Opportunity credit.
Example 1. Christina enrolled in College of the Canyons for her freshman year. She was
required to pay a separate student activity fee in addition to her tuition. All students are
required to pay the activity fee. The funds are used to fund on-campus organizations and
activities run by students, such as the student newspaper and the student government. No
portion of the fee covers personal expenses. Because the fee is required for enrollment and
attendance at College of the Canyons, it is a qualified expense for the Lifetime Learning credit
even though it is labeled a student activity fee.
Example 2. John is in his junior year in USC’s degree program in dentistry. In addition to
tuition, he is required this year to pay a fee for the rental of dental equipment he will be
using in the program to the university. John’s equipment rental fee is a qualified educational
expense for the Lifetime Learning credit because the equipment rental is necessary for his
course of study.
Example 3. Henry and Theresa are first-year students at Georgetown University. In their
mandatory first-year classes, they are required to purchase certain books and other reading
materials. No policy is in place by Georgetown about how these materials should be obtained
but if students purchase them from the university bookstore, they will receive a bill from the
school. While Henry bought his books from a friend and Grace bought hers at the bookstore,
both can treat the purchases as qualified education expenses for the Lifetime Learning
credit.
Adjustments to Qualified Education Expenses

Taxpayers cannot claim qualified education expenses if the expenses are paid with tax free
educational assistance such as tax-free parts of scholarships or fellowships, Pell grants,
employer-provided educational assistance, veterans educational assistance or other tax-free
payments.
Scholarship or fellowships are generally treated as tax free. The student may be required to
file a tax return if the scholarship or fellowship either must be or may be applied to room
and board (not a qualified expense) and is required to be included in the student’s gross
income.
Qualified education expenses are not adjusted by amounts the student receives as a loan, a
gift, an inheritance, wages or moneys withdrawn from personal savings.
Example 1. Rita paid $4,000 for tuition and $6,000 for room and board at State University.
No other fees were required for enrollment or classroom attendance. Rita received a $3,000
scholarship and obtained a $5,000 student loan to help pay these costs. The scholarship can
be used to pay any of Rita’s college expenses under its terms. The $3,000 scholarship is
applied by State University against Rita’s $10,000 bill. The $7,000 balance is paid by the
$5,000 student loan and $2,000 from her savings. To calculate the amount of either the
American Opportunity or Lifetime Learning education credit. Rita must reduce her qualified
education expenses by the amount of the scholarship ($3,000) because the entire
scholarship has been excluded from her income. She does not have to reduce her qualified
expenses by any part of the loan proceeds because the student loan is not tax-free
educational assistance. Rita is treated as having paid $1,000 in qualified education expenses
($4,000 tuition - $3,000 scholarship).
Example 2. The facts are the same as in Example 1, except Rita reports her scholarship as
income on her tax return. Because the $3,000 scholarship is reported as income, Rita does
not have to reduce her qualified education expenses and can treat the total tuition of $4,000
as a qualified education expense.
Example 3: Laurie’s son, George, graduated from high school in June and enrolled in college
for the fall semester. All the requirements to claim an American Opportunity credit have
been met. Laurie needs to determine the adjusted qualified education expenses for her son’s
college attendance to calculate the credit. George has $6,000 of qualified education
expenses and $3,000 of room and board. He was the recipient of a $5,500 Pell grant and
took out a $2,500 student loan to pay these expenses. Laurie paid the remaining $1,000 for
the Fall semester. Under its terms and conditions, a Pell grant may be used for any expenses
including room and board. If the Pell grant is applied to the qualified education expenses
(other than room and board), it will qualify as a tax-free scholarship. George will not include
any part of the Pell grant in gross income. After reducing qualified education expenses by
the tax-free scholarship, Laurie will have $500 ($6,000 – $5,500) in qualified education
expenses available to figure her credit.
Example 4. The facts are the same as in Example 1. If, unlike in Example 1, Laurie and George
choose to apply only $2,500 of the Pell grant to the qualified education expenses and to
apply the remaining $3,000 to room and board, only $2,500 will qualify as a tax-free
scholarship. George will be required to include the $3,000 applied to room and board in
gross income, and it will be treated as earned income for purposes of determining whether
he is required to file a tax return. If the $3,000 is George’s only income, he will be below the
filing threshold and will not be required to file a tax return. After the qualified education
expenses have been reduced by the tax-free scholarship, Laurie will have $3,500 ($6,000 –
$2,500) of adjusted qualified education expenses available to figure her tax credit.
As shown in these examples, how the tax-free portion of a Pell grant is applied to education
expenses will determine the qualified education expenses available to figure the education
tax credit. Since room and board is not a qualified education expense and since the Pell grant
can be used to offset the cost of room and board, taxpayers benefit from using the tax-free
Pell grant to offset the cost of room and board first.
Qualified education expenses are subject to adjustment for refunds and may require the
recapture of a credit claimed in a prior year.
If a refund is received during tax year 2019, the amount of the refund is subtracted from the
qualifying education expenses before claiming the credit.
If a refund is received in 2020 but before the 2019 tax return is filed, the amount of the
refund is subtracted from the qualifying education expenses before claiming the credit for
tax year 2019.
If a refund is received in 2020 after the 2019 income tax return has been filed, the credit
received may need to be recaptured and included as a tax in the year the refund was
received.
Example. A taxpayer paid $9,900 in tuition and fees in December 2019 for his son to take
post graduate courses. The taxpayer’s son began college in January 2020. The 2019
taxpayer’s return was filed on February 15, 2020. A Lifetime Learning credit in the amount of
$1,980 was claimed on the return and no other credits were claimed. On February 20, the
taxpayer’s son withdrew from two courses and the taxpayer received a refund of $3,000. The
2019 Lifetime Learning credit must be recalculated based on $6,900 in qualified educational
expenses rather than the original $9,900. The recalculated credit would be $1,380. The
difference in the recalculated credit increases the taxpayer’s tax liability by $600 ($1,980-
$1,300). The recaptured tax will be included in the 2020 return per the instructions.
Who Is an Eligible Student?

For the Lifetime Learning Credit, an eligible student is enrolled in one or more courses at an
eligible institution.
Lifetime Learning Credit Summary

The Lifetime Learning Credit is a nonrefundable credit for an unlimited number of years of
post-secondary education. The credit is 20% of the first $10,000 in educational expenses paid
for the taxpayer, the spouse or dependent. The credit is a single credit per taxpayer
regardless of the number of students for whom qualified expenses are paid. Qualified
expenses are for tuition, books, supplies and equipment for a course of study in an academic
period. The Lifetime Learning credit can only be claimed if the eligible student receives a
Form 1098-T from the qualifying post-secondary institution. The credit cannot be claimed by
a taxpayer filing as married filing separately. The credit may be reduced or phased out at
higher taxpayer incomes.
Source: IRS Form 8863 2018
Comparison Between the American Opportunity Credit and
the Lifetime Learning Credit
The primary differences between the American Opportunity and Lifetime Learning Credits
are:
1. The American Opportunity Credit is a per student credit; the Lifetime Learning Credit
is a per tax return credit.
2. The American Opportunity Credit is available for the qualifying expenses for a
qualifying student only for the first four (4) years of post-secondary education. The
Lifetime Learning Credit is available for an unlimited number of years.
3. The maximum yearly tax credit available for the American Opportunity Credit is
$2,500 per student of which 40% may be refundable. The maximum available credit
for the Lifetime Learning Credit is $2,000 per tax return and is nonrefundable.
4. The American Opportunity Credit “phases out” at MAGI’s of $90,000 (single filers) and
$180,00 (married filing jointly); the Lifetime Learning Credit “phases out” at MAGI’s of
$67,000 (single filers) and $134,000 (married filing jointly).
In choosing which credit to claim, each tax year, taxpayers can elect only one of the credits
for each eligible student. For example, if the taxpayer elects to take the American
Opportunity Credit for a listed dependent, he/she cannot also claim the Lifetime Learning
credit for that same dependent. However, for any year the taxpayer pays qualified expenses
for more than one eligible student, he/she can elect to take the American Opportunity Credit
for one eligible student and the Lifetime Learning credit for another eligible student in the
same tax year.
To qualify for the American Opportunity Credit, the eligible student must not have completed
four years of post-secondary education at a qualifying institution at the beginning of the tax
year. This determination is made by the qualifying institution in issuing a form 1098-T to the
eligible student.
It may be advantageous for a parent whose AGI is too large to be able to claim the credit to
forego claiming the dependent, so the student can claim the credit on his/her own return. In
this instance, the credit is not lost. If the fully refundable portion of the AOTC credit ($1,000)
is available to the student on his/her own return, the parent can compare the tax liability
impact of losing the dependent credit with the value of refundable portion of the AOTC credit
to the student to determine if there is a tax advantage to having the student claim the AOTC
credit.
Choosing Between the American Opportunity Credit and
the Lifetime Learning Credit
In choosing which credit to claim, each tax year, taxpayers can elect only one of the credits
for each eligible student. For example, if the taxpayer elects to take the American
Opportunity Credit for a listed dependent, he/she cannot also claim the Lifetime Learning
credit for that same dependent. However, for any year the taxpayer pays qualified expenses
for more than one eligible student, he/she can elect to take the American Opportunity Credit
for one eligible student and the Lifetime Learning credit for another eligible student in the
same tax year.
The American Opportunity and Lifetime Learning credits can be claimed if the qualified
expenses are paid by the taxpayer, his/her spouse, by the dependent student or by a third
party.
No Double Benefit Allowed

American Opportunity and Lifetime Learning Credits
Taxpayers may be eligible to claim both the American Opportunity Credit and the Lifetime
Learning Credit during the tax year for the same eligible student. They can determine which
credit provides the greater tax benefit and make a choice between the two credits.
Taxpayers paying qualified education expenses for more than one eligible student do not
have to claim the same credit for each eligible student. Taxpayers paying qualified expenses
for two eligible students can claim an American Opportunity Credit for one and a Lifetime
Learning Credit for the other in the same tax year. Since the total of the American
Opportunity Credit is $500 more than the Lifetime Learning Credit and is partially refundable,
the more favorable tax benefit would be to claim the American Opportunity Credit for both
if both are eligible.
Taxpayers cannot claim an American Opportunity Credit and use any of the qualifying
student’s expenses in figuring the Lifetime Learning Credit. If both credits are taken in the
tax year, each must be based on different expenses for different students.
Taxpayers cannot deduct qualified education expenses as a work-related business expense

and use those expenses to claim an American Opportunity Credit.
Recapture of Education Credits

Depending on the policy of the educational institution, eligible students may be able to drop
a course or courses and receive a refund of tuition paid. If an educational credit was taken
for the full amount of the tuition paid and the student receives a refund, the credit must be
recaptured. The amount to be recaptured is the difference in the tax liability between the
credit for the full amount of the tuition paid and the reduced credit for the tuition paid after
the refund was received from the educational institution.
Example 1. Jessica paid $6,000 in tuition and fees in December 2019 for the semester
beginning in January 2020. She filed her return on January 31 and claimed a Lifetime Learning
Credit of $1,200 (20% of $6,000) on her 2019 tax return. On February 15, Jessica dropped two
courses and the institution refunded her $1,500 in tuition. Jessica must refigure her 2019
Lifetime Learning credit and recapture some of the previous credit in her 2020 tax return.
Jessica must refigure her 2019 Lifetime Learning credit using $4,500 instead of $6,000. The
refigured credit is $900 (20% of $4500). Jessica must recapture $300 ($1,200 minus $900) on
her 2020 tax return. She does this by adding $300 to Line 62 of her Form 1040 Schedule 4.
Example 2. Alex paid $5,000 for tuition and fees in December 2019 for his daughter’s spring
semester beginning in January 2020. He filed his 2019 tax return on February 3, 2020 and
claimed a lifetime learning credit of $1,000 ($5,000 qualified education expense paid x 0.20).
That was the only credit claimed. After filing his return, his daughter withdrew from two
courses and he received a refund of $800. Alex must refigure his 2019 lifetime learning credit
using $4,200 ($5,000 qualified education expenses − $800 refund). The refigured credit is
$840 and the increase in his tax liability is $160. The difference of $160 ($1,000 credit
originally claimed − $840 refigured credit) must be included as additional tax liability on his
amended 2019 income tax return.
Married Taxpayers
To summarize, married individuals must file a joint return to claim any of the higher
education credits. Married individuals can qualify to claim an education credit if they fall
under the IRS definition of unmarried (legally separated or having lived apart from their
spouse for the last six months of the year). Individuals filing as Married Filing Separately are
not eligible to claim any of the education credits.
Education Expenses of Employees

Working taxpayers may go back to school for several reasons. They may enroll to complete
their college degree or they may go enroll to take one or more courses that qualify for a
certificate, credential or degree program. They may enroll to take those courses in a
classroom setting or online
Working taxpayers who attend a qualified educational institution and pay qualified
educational expenses may deduct their qualified expenses as an American Opportunity
Credit or Lifetime Learning Credit. The allowable credit or deduction depends on the course
of study undertaken, the number of academic credits and (in the case of the American
Opportunity Credit) if the taxpayer has completed 4 years of post-secondary education and
has used his/her allowable credits.
If the taxpayer has a trade or business, education that maintains or improves job skills are
deductible. For example, if a taxpayer who has a business repairing widgets takes a course
or courses to keep up with the latest widget technology, he/she can deduct the qualified
expenses for taking the course or courses. Since this taxpayer has a trade or business, the
deduction for educational expenses would only be taken on Schedule C, Income from Self
Employment.
Student Loan Interest Deduction

The student loan interest deduction remains the same under the Tax Cuts and Jobs Act.
Interest payments made during the tax year on a qualified student loan are an adjustment
to income that can be claimed by the taxpayer on Form 1040 Schedule 1 to reduce the
taxpayer’s taxable income and lower tax. The maximum benefit adjustment for the student
loan interest deduction is $2,500.
Qualified Student Loan

To qualify, the loan must have been taken out solely to pay qualified education expenses for
the taxpayer, spouse or a listed dependent when the loan was taken out.
There are exceptions to the rules for dependents covering the student loan interest
deduction.
1. The interest can be for the taxpayer’s dependent even if that individual is a dependent
of another taxpayer
2. The interest can be for the taxpayer’s dependent even if that individual files a joint
return with his/her spouse
3. The interest can be for the taxpayer’s dependent even if that individual has gross
income equal to or greater than his/her exemption amount
Loans from relatives are not qualified student loans so the interest paid to a related person
(spouse, brother or sister, half-brother or half-sister, parents or grandparents, children or
grandchildren) is not deductible.
For the interest to be deductible, the qualified education expenses must be paid in a
reasonable length of time after the loan proceeds have been received. The proceeds are to
be distributed to pay for qualified education expenses beginning 90 days before the start of
the academic period and 90 days after the end of the academic period.
For the interest to be deductible, the eligible student must have been enrolled at least half-
time in a program leading to a degree, certificate or educational credential.
Legally Obligated to Pay
A key element to taking the student loan interest deduction is found in the term “legally
obligated to pay.” This requirement is a cause for the deduction to be disallowed.
For example, the loan document names the dependent child as the borrower and he/she
intends to repay the loan after graduation. However, to be helpful after graduation, the
parents make the payments on the note. Neither the parents nor the child can claim the
interest deduction because the parents making the payments were not legally obligated to
pay the note. If the parents cosigned the note, they would be legally obligated to pay and
would be able to deduct the student loan interest payment.
Example. Norma paid $960 interest on her qualified student loan in 2019. Norma is the sole
signer on the loan. Therefore, she is legally obligated to make the payments. Norma is
claimed as a dependent on her parent’s 2019 return. Since the parents are not legally
obligated to pay the loan, they cannot deduct the student loan interest paid by their daughter
on their return.
Claiming the Deduction

Student loan interest is reported to the payer on Form 1098-E
The taxpayer can claim the student loan interest deduction if the following findings can be
made:
1. The interest was paid on a qualified student loan

2. The filing status is single, married filing jointly, head of household or qualifying
widow(er). Taxpayer’s filing as married filing separately cannot claim the credit.
3. The taxpayer who paid the student loan interest is not being claimed as a dependent
on another taxpayer’s return.
4. Loan origination fees are treated as interest and accrue over the life of the loan.
5. Interest on credit card debt where the use of the credit is to pay only qualified
education expenses is deductible.
Interest paid by others. If you are the person legally obligated to make interest payments
and someone else makes a payment of interest on your behalf, you are treated as receiving
the payments from the other person and, in turn, paying the interest.
Example 1. Ellen obtained a qualified student loan to attend college. After graduation, Ellen
worked for a nonprofit organization as an intern. The nonprofit organization made an
interest payment on behalf of Ellen as a condition of her internship. Assuming all required
qualifications are met, Ellen can deduct the payment as interest because the payment was
reported on her W-2, box 1 as additional compensation.
Example 2. Charles took out a qualified student loan for college. His first monthly loan
payment was due in December after graduating. Charles’ mother gave him a gift by making
the first payment for him. Assuming all required qualifications are met, Charles can deduct
this interest payment on his tax return because no one is claiming him as a dependent.
Effect of Modified Adjusted Gross Income (MAGI)

The student loan interest deduction is phased out or reduced at an MAGI between $70,000
and $85,000 (single, head of household, qualifying widow(er)) and between $140,000 and
$170,000 (married filing jointly). The deduction is phased out completely at or above $85,000
(single, head of household, qualifying widow(er)) and at or above $170,000 (married filing
jointly).
The MAGI for phase out purposes is reported on Line 7 of Form 1040 before accounting for
the student loan interest deduction on Schedule 1 Line 33, and domestic production
activities deduction. The corresponding entries for Form 1040NR is line 35 and for Form
1040NR-EZ is line 10.
Example. A single taxpayer paid $720 in student loan interest. His MAGI is $80,000. His
student loan interest deduction will be reduced to $480. His eligible student loan interest is
calculated as:
$720 x ($80,000 - $75,000 / $15,000) = $720 x .33 = $240 reduction.
$720 - $240 = $480 deduction.
No Double Benefit Allowed

Under the Tax Cuts and Jobs Act, taxpayers cannot deduct as student loan interest the
amount of interest paid on a home equity line of credit for funds used for qualified higher
education expenses.
Student Loan Forgiveness

There are eleven Federal and State student loan forgiveness programs. Some have tax
consequences and some do not.
Currently, the only forgiven Federal direct loans that are tax exempt are through the Public
Service Loan Forgiveness Program and the Student Loan Forgiveness Program for Teachers.
The Public Service Loan Forgiveness Program is available to graduates who are employed by
a government organization, a public child or family service agency, a tribal college or
university or a not-for-profit 501 (c) (3) organization. To qualify, students employed in public
service must have made 120 student loan payments in the required amount and on time.
The Student Loan Forgiveness Program for Teachers was established to encourage teachers
to teach in low income school districts. The individual must have taught full time for 5
consecutive years in a low income elementary or secondary school.
Pay as you earn student loan repayment is caps repayment at 10-15% of income. After 20-
25 years of repayment, the balance is forgiven. The forgiven balance is taxable and is
reported to the borrower on form 1099-C.
Two Obama-era rules were intended to protect student loan borrowers. Borrower Defense
to Repaying allows students to have their federal student loans forgiven if a school employed
illegal or deceptive practices to encourage students to borrow debt to attend the school. The
Gainful Employment Rule established a formula whereby on average, student loan
borrowers must not have loan payments that exceed 20% of their discretionary income or
8% of their total earnings.
Both rules were written in response to practices stemming from for-profit colleges which
included companies such as Corinthian Colleges and ITT Technical Institute, both of which
shut down as a result.
There are no tax consequences for individuals whose student loans were discharged under
these rules.
The Tax Cuts and Jobs Act left in place the rules that allowed certain qualifying students to
exclude cancellation of student loan debt from income.
Student loan repayment assistance made on behalf of taxpayers to be tax-free in some

circumstances were retained by the Tax Cuts and Jobs Act. Loan repayment assistance is
non-taxable if received for:
1. The National Health Services Corps loan repayment program.

2. A state education loan repayment program eligible for funds under the Public Health
Services Act.
3. Any other State loan repayment or loan forgiveness program that is intended to
provide for increased availability of health services in underserved or health
professional shortage areas determined by the State.
Other Education Tax Benefits

This section covers:
1. Coverdell Education Savings Account (ESA)

2. Qualified Tuition Program (QTP)
3. Education Savings Bond Program
Coverdell Education Savings Account (ESA)

The Tax Cuts and Jobs Act did not change the rules for Coverdell ESA’s.
The Coverdell ESA is a tax-advantaged investment account designed to cover future

expenses for elementary, secondary or college education. The Coverdell ESA is named after
Paul Coverdell, a well-regarded United States Senator from Georgia, who sponsored the
education savings account. Paul Coverdell died in office in 2000.
Contributions to a Coverdell ESA are not tax deductible. They are considered “tax-
advantaged” because the funds grow tax free until distributions are made for the
beneficiary’s qualified education expenses.
The Coverdell ESA must be established for a designated beneficiary under 18 or a beneficiary
with special needs, must be designated as a Coverdell ESA when the account is established
and must meet the following conditions:
1. The account trustee must be a bank or approved IRS financial entity

2. Contributions must be in cash
3. Contributions must be made in full before the beneficiary reaches 18 unless the
beneficiary is a special needs individual
4. Contributions are limited to $2,000 per year per beneficiary
5. The funds cannot be invested in life insurance contracts
6. The funds cannot be comingled with other funds except in a common trust or
investment fund.
7. Any account balance must be distributed within 30 days of the date the beneficiary
reaches 30 years of age (unless the beneficiary is an individual with special needs) or
within 30 days of the beneficiary’s death whichever is earlier.
Eligible Educational Institution

Elementary and Secondary School
Any public, private or religious school providing elementary (kindergarten included) or
secondary education (through grade 12) under state law is an eligible institution.
Post-Secondary School
In the U.S., secondary education refers to high school, so post-secondary refers to education
that comes after high school such as non-degree certificate programs, community colleges
that grant associate degrees and colleges and universities that grant academic degrees.
Virtually all accredited public, private and profit-making proprietary post-secondary schools
are eligible institutions. This would include all colleges, universities, vocational schools (as
well as certain institutions located outside the U.S.) eligible to participate in a U.S.
Department of Education student aid program.

Elementary and Secondary School
These are expenses related to enrollment or attendance at an eligible elementary or
secondary school. As shown in the following list, to be qualified, some of the expenses must
be required or provided by the school. There are special rules for computer-related
expenses.
The following expenses must be incurred by a designated beneficiary in connection with
enrollment or attendance at an eligible elementary or secondary school:
1. Tuition and fees

2. Books, supplies, and equipment
3. Academic tutoring
4. Special needs services for a special needs beneficiary
The following expenses must be required or provided by an eligible elementary or secondary

school in connection with attendance or enrollment at the school:
1. Room and board

2. Uniforms
3. Transportation
4. Supplementary items and services (including extended day programs).
The purchase of computer technology, equipment, or Internet access and related services is
a qualified elementary and secondary education expense if it is to be used by the beneficiary
and the beneficiary’s family during any of the years the beneficiary is in elementary or
secondary school. (This does not include expenses for computer software designed for
sports, games, or hobbies unless the software is predominantly educational in nature.)
Post-secondary School
These are expenses related to enrollment or attendance at an eligible postsecondary school.
As shown in the following list, to be qualified, some of the expenses must be required by the
school and some must be incurred by students who are enrolled at least half-time.
The following expenses must be required for enrollment or attendance of a designated

beneficiary at an eligible postsecondary school:
1. Tuition and fees

2. Books, supplies, and equipment
Expenses for special needs services needed by a special needs beneficiary must be incurred
in connection with enrollment or attendance at an eligible postsecondary school.
Expenses for room and board must be incurred by students who are enrolled at least
halftime. The expense for room and board qualifies only to the extent that it is not more
than the greater of the following two amounts:
1. The allowance for room and board, as determined by the school, that was included
in the cost of attendance (for federal financial aid purposes) for a particular academic
period and living arrangement of the student.
2. The actual amount charged if the student is residing in housing owned or operated
by the school.
The taxpayer may need to contact the eligible educational institution for qualified room and
board costs.
The purchase of computer or peripheral equipment, computer software, or Internet access

and related services if it is to be used primarily by the beneficiary during any of the years the
beneficiary is enrolled at an eligible postsecondary school. (This does not include expenses
for computer software for sports, games, or hobbies unless the software is predominantly
educational in nature.)
For a student to be considered enrolled “at least half-time,” the student must carry at least
half of the full-time academic workload for the course of study pursued. This is determined
by the standards of the school where the student is enrolled.
Contributions
To contribute to a Coverdell ESA, the contributor’s modified adjusted gross income must be
less than $110,000 ($220,000 for married couples filing jointly).
Corporations, regardless of income level, are permitted to contribute to a Coverdell ESA.
The total contributions to all Coverdell ESA’s on behalf of one beneficiary cannot be more
than $2,000. If parents, grandparents and a godparent all want to contribute to newborn,
the sum of all their contributions cannot be more than $2,000. The most any single
contributor can contribute to a Coverdell ESA is $2,000 regardless of how many Coverdell
ESA’s have been established on behalf of the beneficiary. A single contributor can, however,
contribute $2,000 to each beneficiary’s Coverdell ESA, if, for, example, there is more than one
child beneficiary with a Coverdell ESA in a family.
There may be a reduced limit if the contributor’s MAGI is between $95,000 and $110,000
($190,000 to $220,000 for a married couple filing jointly). If the MAGI is $110,000 or more
($220,000 for a married couple filing jointly) no contribution can be made to a Coverdell ESA
for any beneficiary.
Excess Contributions
There is a 6% tax each year on excess contributions in a Coverdell ESA at year’s end. Excess
contributions are defined as
1. Contributions to the beneficiary’s Coverdell ESA over $2,000

2. Contributions from the prior year over $2,000 reduced by the total of distributions
during the year and the contribution limit for the current year minus the actual
amount contributed.
Rollovers and Transfers

Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary
can be changed. The beneficiary's interest can be transferred to a spouse or former spouse
because of divorce.
Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another
Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family
(including the beneficiary's spouse) who is under age 30. This age limitation does not apply
if the new beneficiary is a special needs beneficiary.
Only one rollover is allowed per 12-month period, and it must be completed within 60 days
after the date of the distribution.
Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form
1040. These are not taxable distributions.
For these purposes, the beneficiary's family includes the beneficiary's spouse and the
following other relatives of the beneficiary:
1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
2. Brother, sister, stepbrother, or stepsister
3. Father or mother or ancestor of either
4. Stepfather or stepmother
5. Son or daughter of a brother or sister
6. Brother or sister of father or mother
7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-
law
8. The spouse of any individual listed above
9. First cousin
Distributions
Coverdell ESA distributions can be taken at any time as tax-free or taxable.
Coverdell ESA Distributions at a Glance
Tax Free Distributions

Distributions are tax-free if the amount of the distribution is no more than the beneficiary
used to pay for qualified education expenses. In that case, the distribution (including
rollovers) is not reported.
Taxable Distributions
The amount of the distribution that is not used to pay for qualified education expenses is
taxable to the beneficiary.
Taxpayers receive a Form 1099-Q showing the funds that were distributed during the tax
year (Box 1 Gross Distribution) plus the earnings (Box 2) and the basis (Box 3 amount
contributed). The Fair Market Value (the balance in the account) is shown in the blank box as
the FMV.
Calculating the Taxable Portion of a Coverdell ESA Distribution
The earnings that have accumulated tax-free in the beneficiary’s account are the portion that
will be taxable if the amount of the distribution is more than the amount used to pay for
qualified education expenses.
The amount of the distribution is multiplied by the fraction with the contributions as the
numerator and the FMV added to the distribution as the denominator.
This result provides the basis portion of the distribution equal to the amount contributed.
The basis portion subtracted from the distribution equals the earnings portion included in
the distribution.
The earnings portion is multiplied by the fraction with the qualified education expenses as
the numerator and the gross distribution as the denominator to obtain the tax-free portion
of the earnings.
The tax-free portion of the earnings is subtracted from the earnings included in the
distribution. The result is the taxable portion of the earnings that must be reported as
income.
Education Exception to Early Distribution Penalty for IRA’s

The Tax Cuts and Jobs Act did not change the IRA penalty exception for education
distribution.
Taxpayers may take a distribution from an IRA before reaching 59½ and will not have to pay
the 10% additional tax on an early withdrawal if taxpayers pay qualified expenses for
themselves, their spouse, their child, foster child, adopted child or descendant of any one of
them.
Qualified Tuition Program (QTP)

A qualified tuition program is a program set up to allow the taxpayer to either prepay, or
contribute to an account established for paying, a student’s qualified education expenses at
an eligible educational institution. It is also known as a 529 plan. QTPs can be established
and maintained by states. The state government or the eligible educational institution in
which the taxpayer is interested can tell the taxpayer whether they participate in a QTP or
not and what requirements must be met.
QTP earnings grow tax free but may be a taxable portion of a distribution if the distribution
is more than the qualified tuition expenses.
Qualified education expenses are for enrollment or attendance at an eligible educational

institution. To qualify, the expenses must be required by the educational institution and
must be for a student enrolled at least half-time.
Qualified expenses cover tuition and fees plus books, supplies and equipment. Expense for
room and board qualifies if included in the cost of attendance if the student is residing in the
institution’s student housing.
Qualified Tuition Programs differ from a Coverdell ESA. With a QTP, ownership remains with
the contributor and is not passed to the designated beneficiary. Taxpayers can own a QTP,
have the distributions made to them and report the Form 1099-Q distribution data on their
own returns even though the distribution was for the benefit of a dependent. Distributions
from a Coverdell ESA on Form 1099-Q are reported on the beneficiaries’ tax returns.
Contributions
There are no “phase out” income restrictions for individual contributions to a QTP.
Contributions can be made to a QTP and to a Coverdell ESA without penalty so long as the
contributions are not more than the qualified payments for tuition and fees plus books,
supplies and equipment along with the beneficiary’s qualified room and board
Distributions
Tax Free Distributions
The portion of the distribution equal to the amount contributed to a plan is a return on the
investment and is not included in income.
Taxable Distributions
The earnings that have accumulated tax free are the taxable portion of the distribution only
if the distribution is more than the qualified educational expenses incurred.
The Tax Cuts and Jobs Act expanded potential usage of 529 plans to include a distribution of
up to $10,000 for K-12 tuition for public, private and religious schools where previously
Coverdell ESA funds could be used only for primary and secondary expenses. Taxpayers will
also be allowed to roll over amount from a 529 plan into an ABLE account.
The distributed earnings shown on Form 1099-Q are multiplied by the fraction where the
numerator is the qualified educational expenses and the denominator is the total
distribution.
The result equals the amount of the tax-free earnings. The tax-free amount is subtracted
from the total earnings distribution to obtain the taxable amount of the earnings
distribution. That amount is included as income on the QTP contributor’s return.
Coordination
With American Opportunity Tax Credit and Lifetime Learning Credit – These education
credits can be claimed in the same tax year a tax-free distribution from a QTP is taken so
long as the same expenses are not used for both.
With a Coverdell ESA – If there are distributions from both a Coverdell ESA and QTP, the
qualified higher education expenses must be allocated between the two distributions if the
total of the two distributions is more than the qualified educational expenses.
Rollovers
A distribution from a QTP is not taxable if rolled over to another QTP for the same beneficiary
or a member of the beneficiary’s family (spouse included).
Only one rollover to another QTP for the same beneficiary is allowed within 12 months of a
previous transfer to a QTP for that designated beneficiary.
There are no income tax consequences if the name of the beneficiary of a QTP account is
changed if it is changed to a member of the beneficiary’s family.
For example, if a beneficiary graduated from college but had money left in his/her QTP and
wanted to transfer the money to his/her brother in high school, he/she could instruct the
trustee to change the name of the beneficiary on the account to that of his/her brother.
There would be no income tax consequences of such a change.
Early IRA Distributions

Taxpayers can take distributions from an IRA equal to qualified educational expenses of
themselves, their spouse and/or their listed dependents before age 591/2 without paying an
additional penalty on the distribution (10% is the additional penalty for an early distribution
from a traditional IRA)
Education Savings Bond Program

The education savings bond exclusion did not change with the Tax Cuts and Jobs Act.
A qualified U.S. savings bond for the education saving bond program is a series EE bond
issued after 1989 or a series I bond.
The bond must be issued in the name of the taxpayer (as the sole owner) or in the name of
the taxpayer and his/her spouse (as co-owners). The owner or owners must be at least 24
years of age before the issue date of the bond.
Some or all of the interest earned on the bond may be exempt from income if:
1. The taxpayer’s filing status is not Married Filing Separately

2. The proceeds are used to pay qualified educational expenses for an eligible student
3. The taxpayer’s MAGI is less than $93,150 ($147,250 for married couples filing jointly).
Employer-Provided Educational Assistance

Employer provided educational assistance was retained with the Tax Cuts and Jobs Act.
An employer-provided educational assistance program is a written employer plan that meets

certain other requirements. The employer can provide up to $5,250 in educational assistance
to be used for qualified educational expenses. The benefit is tax free, meaning the amount
of the benefit is not added to wages on Form W-2. Taxpayers do not include the assistance
benefit on their tax returns.
Other Types of Educational Assistance

Following are several of the common types of educational assistance that are available to
students along with the ways of dealing with them.
Fulbright Grants
J. William Fulbright was a 20th Century statesman who served over thirty years in the U.S.
Congress. His career was marked by his tenure as the longest serving chairman of the Senate
Foreign Relations Committee.
The Fulbright Scholarship Program sponsors American and foreign participants for
exchanges. The program was established by legislation and was passed in 1946 drawing its
voting strength from the U.S. commitment to develop post World War II leadership and
become constructively engaged with and increase mutual understanding between the
people of the United States and citizens of other countries. There have been more than
250,000 students, scholars and teachers given Fulbright grants.
A Fulbright grant is generally treated as a scholarship or fellowship grant in figuring how

much of the grant is tax free.
Pell Grants and Other Title IV Need-Based Education Grants

The Pell Grant is named after Senator Claiborne Pell of Rhode Island and was originally
known as the Basic Educational Opportunity Grant. Pell Grants were created by the Higher
Education Act of 1965 and are considered to be the foundation of a student’s financial aid
package.
These need-based grants are treated as scholarships for purposes of determining their tax
treatment. They are tax free to the extent used for qualified education expenses during the
period for which a grant is awarded.
Payment to Service Academy Cadets

An appointment to a United States military academy isn't a scholarship or fellowship grant.
Payment you receive as a cadet or midshipman at an armed services academy is pay for
personal services and will be reported to you on Form W-2, box 1. Include this pay in your
income in the year you receive it.
Veterans' Benefits
VA Education benefits may be used toward traditional college degrees, non-college degrees,
on-the-job training, apprenticeships, licensing and certification and fees to cover tests. This
benefit was established with the Serviceman’s Readjustment Act of 1944 (also known as the
G.I. Bill) and provided benefits from veterans returning from World War II.
Payments you receive for education, training, or subsistence under any law administered by
the Department of Veterans Affairs (VA) are tax free. Don't include these payments as income
on your federal tax return. If you qualify for one or more of the education tax benefits, you
may have to reduce the amount of education expenses qualifying for a specific tax benefit
by part or all of your VA payments. This applies only to the part of your VA payments that is
required to be used for education expenses,
You may want to visit the Veterans Administration website at www.gibill.va.gov for specific
information about the various VA benefits for education.
Example. A taxpayer has returned to college and is receiving education benefits under the
latest GI Bill: a $1,234 monthly basic housing allowance (BHA) and $4,340 paid directly to his
college for tuition. Neither of these benefits is taxable and are not reported on his tax return.
He also wants to claim an American opportunity tax credit. His total tuition billing for
qualified education expenses is $6,220. To figure the amount of credit, you must first
subtract the $4,340 from his qualified education expenses because this payment under the
GI Bill was required to be used for education expenses. The basic housing allowance is not
subtracted because it was paid directly to the taxpayer and its use wasn't restricted.
Qualified Tuition Reduction

Qualified tuition reduction refers to receiving either free tuition or paying a reduced rate. If
a taxpayer qualifies and is allowed to study tuition free or for a reduced rate, he or she may
not have to pay tax on this benefit. This is called a “tuition reduction.” The amount of a tuition
reduction is not included in income.
A tuition reduction is qualified only if the taxpayer receives it from, and uses it at, an eligible
educational institution. The tuition reduction does not have to be used at the eligible
institution from which it was received. For example, if a taxpayer works for an eligible
educational institution and an arrangement is made by their state college for the taxpayer
to take courses at another eligible state college without paying any tuition, the taxpayer may
not have to include the value of courses taken for free in income. The rules for determining
if a tuition reduction is qualified, and therefore tax free, are different if the education
provided is below the graduate level or is graduate education. If the tuition is free but is
payment for services (such as for being a graduate assistant), the value of the reduction of
tuition received must be included in income.
Eligible educational institution.

An eligible educational institution is defined for tax purposes as an educational institution
that maintains a regular faculty and curriculum and normally has a regularly enrolled body
of students in attendance at the place where it carries on its educational activities.
Officers, owners, and highly compensated employees.
The tuition reduction benefits must be available on substantially the same basis to each
member of a group of employees. If benefits are available to all employees on a
nondiscriminatory basis, then qualified tuition reductions can apply to officers, owners, or
highly compensated employees as reasonably classified by the employer. The classification
must not discriminate in favor of owners, officers, or highly compensated employees.
Payment for services.

Generally, a student must include in income the part of any qualified tuition reduction that
represents payment for teaching, research, or other services performed by the student and
that are required as a condition of receiving the qualified tuition reduction. Even if all
candidates for a degree must perform the services to receive the degree this condition
applies. However, there are exceptions.
Exceptions.
The part of any scholarship, fellowship or grant that represents payment for teaching,
research, or other services does not have to be included in income if the amount is received
under one of the following:
1. The National Health Service Corps Scholarship Program,

2. The Armed Forces Health Professions Scholarship and Financial Assistance Program,
or
3. A comprehensive student work-learning-service program (as defined in section 448(e)
of the Higher Education Act of 1965) operated by a work college (as defined in that
section).
Education Below the Graduate Level

If a tuition reduction is received for education below the graduate level (including primary,
secondary, or high school), it is a qualified tuition reduction, and therefore tax free. The
tuition reduction is only tax free if the taxpayer’s relationship to the educational institution
that provides the benefit is described below.
1. The taxpayer is an employee of the eligible educational institution.

2. The taxpayer was an employee of the eligible educational institution, but either
retired or left on disability.
3. The taxpayer is a widow or widower of an individual who died while an employee of
the eligible educational institution or who retired or left on disability.
4. The taxpayer is the dependent child or spouse of an individual where the relationship
is described in (1) through (3) above.
Child of deceased parents.

A child is a dependent child if the child is under age 25 and both parents have died. The
dependent child’s qualified tuition reduction is tax free.
Child of divorced parents.
A dependent child of divorced parents is treated as the dependent of both parents for
purposes of the qualified tuition reduction.
Graduate Education
A tuition reduction you receive for graduate education is qualified, and therefore tax free, if
both of the following requirements are met.
It is provided by an eligible educational institution.
The taxpayer is a graduate student who performs teaching or research activities for
the educational institution.
If the above requirements are not met, the taxpayer must include in income any other tuition
reductions for graduate education that are received.
How to Report
Form W-2 box 1 should include as wages any amount of a tuition reduction that is taxable to
the individual. Any tuition reduction that is included as wages on the individual’s Form W-2,
box 1 are to be reported as income on the tax return. The W-2 income that includes an
amount for tuition reduction would be reported on line 1 of Form 1040.

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Education Benefits

Credits and Deductions

The American Opportunity Tax Credit (AOTC)

Calculating the Credit

Claiming the Credit

1. The student is the taxpayer, the spouse or is listed as a dependent

The American Opportunity Tax Credit cannot be claimed if:

1. The taxpayer’s filing status is Married Filing Separately

An eligible institution is an accredited college, university, vocational school, or other post-

Who Is an Eligible Student?

Calculating the Credit

The Lifetime Learning Credit

Calculating the Credit

Claiming the Credit

1. The student is the taxpayer, the spouse or is listed as a dependent.

The Lifetime Learning Credit cannot be claimed if:

1. The taxpayer’s filing status is Married Filing Separately

Qualified Education Expenses

An eligible institution is an accredited college, university, vocational school or other post-

Adjustments to Qualified Education Expenses

Who Is an Eligible Student?

Lifetime Learning Credit Summary

No Double Benefit Allowed

Taxpayers cannot deduct qualified education expenses as a work-related business expense

Recapture of Education Credits

Education Expenses of Employees

Student Loan Interest Deduction

Qualified Student Loan

Claiming the Deduction

1. The interest was paid on a qualified student loan

Effect of Modified Adjusted Gross Income (MAGI)

$720 x ($80,000 - $75,000 / $15,000) = $720 x .33 = $240 reduction.

$720 - $240 = $480 deduction.

No Double Benefit Allowed

Student Loan Forgiveness

Student loan repayment assistance made on behalf of taxpayers to be tax-free in some

1. The National Health Services Corps loan repayment program.

Other Education Tax Benefits

1. Coverdell Education Savings Account (ESA)

Coverdell Education Savings Account (ESA)

The Coverdell ESA is a tax-advantaged investment account designed to cover future

1. The account trustee must be a bank or approved IRS financial entity

Eligible Educational Institution

Qualified Education Expenses

1. Tuition and fees

The following expenses must be required or provided by an eligible elementary or secondary

1. Room and board

The following expenses must be required for enrollment or attendance of a designated

1. Tuition and fees

The purchase of computer or peripheral equipment, computer software, or Internet access

Corporations, regardless of income level, are permitted to contribute to a Coverdell ESA.

1. Contributions to the beneficiary’s Coverdell ESA over $2,000

Rollovers and Transfers

Coverdell ESA Distributions at a Glance

Tax Free Distributions

Education Exception to Early Distribution Penalty for IRA’s

Qualified Tuition Program (QTP)

Qualified education expenses are for enrollment or attendance at an eligible educational

Early IRA Distributions

Education Savings Bond Program

1. The taxpayer’s filing status is not Married Filing Separately

Employer-Provided Educational Assistance

An employer-provided educational assistance program is a written employer plan that meets