With all the required tuition, books, and fees for college students, not to mention the cost of room and board, you may ask, “What education expenses are tax deductible?”
This is a great question, and the answer will vary depending on the tax benefit you seek. If you are looking for a tax credit – such as the American Opportunity Credit (AOC) or Lifetime Learning Credit (LLC) – or a deduction, such as the Tuition and Fees Deduction for education expenses, the list is relatively short, but the qualifications to deduct them are pretty straight-forward. However, if you have education expenses related to your work or business, the list is a bit more inclusive, but the qualifications to deduct the expenses are more complicated.
Education Credits and Deduction:
Qualifying education expenses for AOC include:
- Tuition,
- Mandatory enrollment fees, and
- Books and course materials required by the institution.
Qualifying education expenses for LLC include:
- Tuition,
- Mandatory enrollment fees, and
- Books and course materials, only if required to be purchased directly from the school.
Note that the only difference in qualifying expenses between the two education credits is where you purchase the books and course materials. Furthermore, you can claim these expenses for both your and your dependent’s credits, regardless of who paid them. For example, using money from a student loan, a relative, or another third party.
The following expenses, while often necessary to attend college, are nonqualifying education expenses for both the AOC and LLC:
- Room and board,
- Insurance,
- Medical expenses (including student health fees),
- Transportation, or
- Similar personal, living, or family expenses.
Additionally, for both credits, you cannot claim the credit if any of the following apply:
- Your filing status is married filing separately (MFS).
- You are listed as a dependent on another taxpayer’s tax return.
- Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if married filing jointly (MFJ)).
- You (or your spouse) were a nonresident alien for any part of the tax year, and you (or your spouse) did not elect to be treated as a resident alien for tax purposes.
- You have deducted the same higher education expenses on your personal return as a business expense deduction.
- The qualified education expenses were paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer, which is excluded from taxable income.
- You claim the qualified education expenses to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP, i.e., 529 plan).
- The qualified education expenses are paid with tax-free interest on U.S. savings bonds.
Tuition and Fees Deduction
Even though the Tuition and Fees Deduction expired at the end of 2020, you may need to file or amend an earlier return that involves this deduction. Qualified education expenses for the Tuition and Fees Deduction are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees, course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
Similar to the education credits, the following are nonqualifying education expenses for the Tuition and Fees Deduction (even if the amount must be paid to the educational institution as a condition of enrollment or attendance):
- Room and board,
- Insurance,
- Medical expenses (including student health fees),
- Transportation, or
- Similar personal, living, or family expenses.
Example: In 2022, Jack, with single filing status, had the following expenses related to education:
- Qualified tuition and books: $4,000
- Student health fee: $150
- Room and Board: $3,800
- Personal living expenses: $1,800
How much of the above expenses are considered qualified education expenses for the purpose of the American Opportunity Credit?
Answer: $4,000 (only the qualified tuition and books)
Business Deduction for Work-Related Education
For a taxpayer to deduct education expenses related to work, one of two tests must be met:
- The education must be required by the employer or the law to keep the taxpayer’s present salary, status, or job. The required education must serve a bona fide business purpose of the employer or business.
- The education must maintain or improve the skills needed in the taxpayer’s work.
Additionally, even if one or both of the above are met, the education expenses are not qualifying if:
- They are needed to meet the minimum educational requirements of the taxpayer’s present trade or business or,
- They are part of a program of study that will qualify the taxpayer for a new trade or business.
Qualifying Expenses for Work-Related Education
So, what education expenses can be deducted as work-related? The following education expenses are qualifying:
- Tuition, books, supplies, lab fees, and similar items.
- Certain transportation and travel costs –
- If a taxpayer’s education qualifies, local transportation costs of going directly from work to school are deductible. If a taxpayer is regularly employed and goes to school temporarily (generally one year or less), the costs of returning from school to home are also deductible.
- A taxpayer can deduct expenses for travel, meals (subject to 50% limitation rules), and lodging if the overnight travel was mainly to obtain qualifying work-related education and is temporary (generally one year or less).
- Other education expenses, such as costs of research and typing when writing a paper as part of an educational program.
Additional items related to work-related education, which are nondeductible:
- Expenses related to tax-exempt and excluded income.
- Cost of travel as a form of education, even if directly related to their duties in work or business.
- Expenses for personal activities, such as sightseeing, visiting, or entertaining.
- Work-related education expenses are not deductible as business expenses if the taxpayer received a benefit from these expenses under any other provision of the tax law – for example, as an education credit or deduction (if before 2021). However, a taxpayer can choose to allocate some of their education expenses as a business expense deduction and others towards an education credit or deduction, as long as it is not the same expense for each one.
- Work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance.
It should be noted that only in the following situations are work-related education expenses deductible:
- A taxpayer files Schedule C (Form 1040), Schedule C-EZ (Form 1040), if before 2019, or Schedule F (Form 1040), if he or she is self-employed; or
- A taxpayer files Form 2106, if he or she is a qualified performing artist or fee-based state or local government official; or
- A taxpayer itemizes their deductions on Schedule A (Form 1040 or 1040NR) if he or she is a disabled individual with impairment-related education expenses.
For tax years 2018 through 2025, employee education expenses are not deductible as a miscellaneous itemized deduction subject to a 2% adjusted gross income (AGI) limitation. Miscellaneous itemized deductions subject to the 2% AGI limitation are suspended for these tax years. After 2025, work-related education expenses should be deductible on Form 2106 for all qualifying employees.
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