What counts as qualified education expenses for college tax breaks?

This article was fact-checked by our editors and Jennifer Samuel, senior product specialist for Credit Karma.  It has been updated for the 2020 tax year.

Education-related tax breaks are kind of like that. The IRS has rules for what types of expenses qualify for a student tax credit or tax deduction. And not every cost you face in your pursuit of a college degree will count as a “qualified education expense.”

For example, tuition costs might qualify you for an education-related tax break, but the expense of stocking your off-campus apartment’s refrigerator almost certainly won’t.

Before you (or your parents) pursue an education-related tax break, it’s important to know what the IRS considers a qualified education expense — and what it doesn’t. And keep in mind that different tax breaks have different criteria for what’s considered a qualifying expense.

While the Tax Cuts and Jobs Act of 2017 made significant changes to the tax code, it didn’t affect most education benefits – outside of a few changes to eligible 529 plan deductions. Most education benefits will likely stay the same, although it is possible the IRS could still make changes for the tax year. So be sure to check for updates from the IRS before you try to file your tax return claiming any education benefits.

Let’s look at some education-related tax breaks and what counts as qualified education expenses for each.

• American opportunity tax credit
• Lifetime learning credit
• Student loan interest deduction
• Qualified tuition programs (529 plans)
• Tax-free scholarships and fellowship grants
• Early IRA withdrawals

American opportunity tax credit

The American opportunity tax credit, or AOTC, gives taxpayers a dollar-for-dollar reduction in their tax liability for education expenses paid for in the first four years of higher education.

The credit is worth 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of qualifying expenses, for a maximum credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to $0, 40% of the remaining amount of the credit (up to $1,000) may be refundable.

To be eligible, the student needs to be enrolled at least half-time and meet additional eligibility requirements, such as no record of a felony drug conviction, and the individual claiming the credit needs to meet modified adjusted gross income requirements.

Qualified education expenses

• Tuition at an eligible educational institution
• Student activity fees if they’re a condition of enrollment or attendance and are paid to the institution
• Textbooks, supplies and equipment needed for courses — and you don’t have to purchase them from the school for these costs to qualify

Lifetime learning credit

The lifetime learning credit is worth 20% of the first $10,000 of qualified education expenses, up to a maximum of $2,000 per return. Unlike the AOTC, the LLC does not include a refundable tax credit, meaning if the amount of the credit exceeds the tax you owe, you can’t get the excess as a refund.

You can claim the LLC for an unlimited number of years, and you can be enrolled less than half-time to claim it. But you must meet other eligibility requirements, such as being enrolled for at least one academic period beginning in the tax year in an eligible educational institution and the person claiming the credit stays within the limits on modified adjusted gross income.

Qualified education expenses

• Tuition at an eligible educational institution
• Student activity fees (if required for enrollment and paid to the institution)
• Books, supplies and equipment (if required for enrollment and paid to the educational institution)

Student loan interest deduction

Taxpayers with modified adjusted gross income of less than $85,000 ($170,000 for married couples filing jointly) may be able to take a deduction for interest paid on qualified student loans for eligible students. The deduction is worth a maximum of $2,500.

The student loan interest deduction is an “above-the-line” deduction, meaning taxpayers can claim the deduction and reduce their taxable income regardless of whether they itemize or take the standard deduction.

Qualified education expenses

Student loan interest is deductible only if the loan was taken out solely to pay qualified education expenses. For the purposes of this deduction, those expenses include …

• Tuition and fees
• Room and board
• Books, supplies and equipment
• Other necessary expenses, like transportation

Qualified tuition programs (529 plans)

Qualified tuition programs are better known as 529 plans, after the section of the tax code that addresses them. They’re tax-advantaged savings plans designed to encourage Americans to save for educational costs for eligible students.

These plans may be sponsored by states or private colleges and universities. They come in two forms.

1. Prepaid tuition plans: They let the owner purchase future course credits at today’s prices.
2. Education savings plans: Investment accounts used to save for future education expenses.

The benefit of a 529 plan is that account earnings can grow tax-free while the money is invested. When money is withdrawn, as long as it is used to pay for qualified education expenses, those earnings are not subject to federal income tax. Some states also offer tax breaks for contributions to and withdrawals from 529 plans.

And, thanks to the Tax Cuts and Jobs Act of 2017, you can also use 529 funds to pay for up to $10,000 of qualified education expenses for each child you have in kindergarten through 12th grade, whether it’s a public, private or religious school. Withdrawals won’t be subject to federal tax as long as the expenses meet federal qualifications. However, your withdrawals may be subject to state taxes or penalties, depending on the state you live in, so be sure to check the rules for your state.

Qualified education expenses

For higher education, the following expenses may qualify:

• Tuition and fees required for enrollment at an eligible educational institution
• Books, supplies and equipment required for enrollment
• Expenses for special-needs services in connection with enrollment or attendance
• Room and board incurred by eligible students
• Computers and peripheral equipment, educational software and internet access

However, these expenses don’t qualify for elementary and secondary school education expenses. For elementary and secondary school, you can only deduction up to $10,000 in tuition during a tax year.

Tax-free scholarships and fellowship grants

Funds received from scholarships and fellowships are tax-free if you meet the following conditions:

1. The recipient must be a candidate for a degree at an eligible educational institution
2. The funds must be used to pay qualified education expenses

Qualified education expenses

• Tuition and fees required to enroll at or attend an eligible educational institution
• Required course-related expenses like fees, books, supplies and equipment

Early IRA withdrawals

Normally, if you withdraw money from a regular IRA before you’re 59½, you’ll have to pay tax on that money and a 10% penalty for your early distribution. After all, IRAs are supposed to help you save for retirement.

But if the early distribution is used to pay for qualified higher-education expenses at an eligible educational institution, you may qualify for an exception to the additional 10% tax. But you might still owe income tax on at least part of the distribution.

Qualified education expenses

• Tuition if required for enrollment or attendance at an eligible educational institution
• Fees if required for enrollment or attendance at an eligible educational institution
• Books, supplies and equipment if required for enrollment or attendance at an eligible educational institution
• Room and board (if the student is enrolled at least half time)
• Special needs services for special needs students in connection with their enrollment and attendance

To qualify, all these expenses must be required for enrollment and attendance. Some expenses that do not qualify for these tax breaks include student health insurance premiums and medical expenses, personal living expenses other than room and board, and fees paid to engage in sports, hobbies or social activities on campus.

What’s an eligible educational institution?

For tax purposes, the IRS considers an eligible educational institution to be one that’s primarily engaged in presenting formal instruction, maintains a regular facility and curriculum, and has a regularly enrolled student body attending the facility where the instruction occurs.

Bottom line

The precise definition of qualified education expenses varies depending on the education expense tax break you wish to claim. For that reason, it’s a good idea to familiarize yourself with the rules of each of these credits, deductions and tax rules, and decide which one will give you the bigger tax benefit.

Also, keep in mind that there is no double dipping. You can’t use the same expenses to qualify for two different tax breaks. For example, you can’t take a tax-free withdrawal from a 529 plan and claim the AOTC for those same expenses. Whichever tax break you take advantage of, keep records of your expenses so you can save money when you file your return.

Relevant sources: IRS: American Opportunity Tax Credit | IRS About Publication 970, Tax Benefits for Education | IRS: Lifetime Learning Credit | IRS: Tax Benefits for Education Information Center | U.S. Securities and Exchange Commission: An Introduction to 529 Plans | IRS: Education Benefits – No Double Benefits Allowed

Jennifer Samuel, senior tax product specialist for Credit Karma, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.