Qualified Education Expenses: Eligibility, Deduction, and 2023 Tax Benefits
Expenses incurred while pursuing higher education that are eligible for tax benefits are considered as qualified education expenses. If your expenses are eligible, you will receive a Form 1098-T, Tuition Statement, from the educational institution.
There are three ways to claim these expenses on your tax return:
The LLC allows for the cost of a course aimed at improving job skills to be included. However, all three options have income limits and require at least one additional form to be attached to your Form 1040 when claiming.
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What Is a Qualified Higher Education Expense (QHEE)?
A qualified higher education expense (QHEE) is a term used to describe expenses related to higher education that are eligible for tax benefits. This includes tuition, fees, books, supplies, and equipment necessary for enrollment or attendance at an accredited postsecondary institution, such as public, private, non-profit, or for-profit schools.
To verify your expenses are eligible, look for a Form 1098-T, Tuition Statement, from the educational institution.
Who Must Pay Qualified Education Expenses?
The payment of qualified education expenses is the responsibility of the student, a parent of the student, or the student's spouse.
The person responsible for paying these expenses is also the one who claims the tax benefits associated with them. In other words, the person who incurs the expenses is the one who is eligible to claim the associated tax benefits.
What Can I Claim as a Qualified Education Expense?
Qualified education expenses that are generally eligible for tax benefits include: tuitions, fees, books, supplies and types of equipment that is required for enrollment or attendance at an accredited postsecondary institution. Additionally, the lifetime learning credit (LLC) allows for the cost of a course aimed at improving job skills to be included.
However, non-essential expenses, such as transportation costs or room and board, are not considered qualified education expenses for tax purposes.
NOTE! It is important to keep receipts and other documentation of these expenses in case of an audit.
What is an Eligible Educational Institution?
An eligible educational institution refers to a postsecondary school that is accredited and recognized by the Department of Education. This can include public or private colleges and universities, as well as vocational schools and trade schools.
The institution must also participate in the student aid programs administered by the Department of Education in order for the student's education expenses to be eligible for tax benefits.
What Education Expenses do Not Qualify?
Not all expenses incurred during education are considered qualified expenses for tax purposes. The following are examples of expenses that do not qualify:
- Transportation costs.
- Student health fees and medical expenses.
- Room and board, or any other living expenses.
- Insurance, including property or renters insurance for students.
- Costs of sports, games, or hobbies that are not required for your degree program.
- Expenses for non-credit courses, unless they are a necessary part of your degree program.
NOTE! The LLC may allow you to include the cost of a career development course.
Not sure if your expenses qualify?
Get a free consultation with a tax pro!
How to Deduct Education Expenses?
There are three ways to deduct qualified education expenses on your tax return. These methods include the tuition and fees deduction, the American opportunity tax credit, and the lifetime learning credit.
Here's a closer look at each option:
1. Tuition and Fees Deduction
The tuition and fees deduction allows taxpayers to deduct up to $4,000 of qualified education expenses from their taxable income.
This deduction is available to all taxpayers and is taken as an adjustment to income, meaning you don't have to itemize your deductions to claim it.
2. American Opportunity Tax Credit (AOTC)
The AOTC is a tax credit of up to $2,500 per eligible student and is available to taxpayers with modified adjusted gross income (MAGI) up to $80,000 for individuals and $160,000 for married couples filing jointly.
Unlike the tuition and fees deduction, the AOTC is a tax credit, meaning it directly reduces the amount of tax you owe.
3. Lifetime Learning Credit (LLC)
The LLC is a tax credit of up to $2,000 per tax return, regardless of the number of students in your household. This credit is available to taxpayers with a MAGI of up to $68,000 for individuals and $136,000 for married couples filing jointly.
Like the AOTC, the LLC is a tax credit and directly reduces the amount of tax you owe.
To claim any of these tax breaks, you'll need to complete the appropriate form and attach it to your tax return. It's always a good idea to consult with a tax professional for specific guidance on deducting education expenses, as the rules and requirements can be complex.
1. How to Calculate Total Qualified Education Expenses?
To calculate your total qualified education expenses, you need to add up all qualifying expenses incurred during the tax year. If you have received a Form 1098-T, you can use the information on it to determine the total expenses. If Box 1 on the form has an amount and Box 5 is blank, your qualified expenses would equal that amount plus any other qualifying expenses such as books and supplies.
However, if both Box 1 and Box 5 have amounts, subtract the amount in Box 5 from the amount in Box 1 to determine your total qualified education expenses.
2. How to Prove Qualified Education Expenses?
To prove your qualified education expenses, you should keep all receipts and records related to the expenses you paid, such as tuition bills, receipts for books and supplies, and any other documentation. You may also receive a Form 1098-T, Tuition Statement, from the educational institution indicating the amount of tuition and related expenses paid during the year.
3. What Covers All Qualified Higher Education Expenses?
Qualified higher education expenses include tuition and fees required for enrollment or attendance, as well as books, supplies, and equipment required for the courses. Room and board, transportation, and other similar personal expenses do not qualify.
4. What Are Other Qualified Expenses for 1098-T?
Other qualified expenses for Form 1098-T may include laboratory fees, certain student activity fees, and expenses for course-related books, supplies, and equipment, as long as they are required for enrollment or attendance in the course. It is best to consult with a tax professional or the educational institution for a complete list of qualified expenses.