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. Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications.
- Don’t reduce the qualified education expenses by any scholarship or fellowship grant reported as income on the student’s tax return in the following situations.
- 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 your IRA distribution is equal to or less than your AQEE, you aren’t subject to the 10% additional tax.
- For tax years beginning after 2017 and before 2026, you no longer deduct work-related education expenses as a miscellaneous itemized deduction subject to a 2%-of-adjusted-gross-income floor.
The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Assuming that all other conditions are met, the most you can exclude from your gross income is $1,500. The $1,000 you received for teaching must be included in your gross income. For more information, see Higher Education Emergency Grants Frequently Asked Questions on IRS.gov. You can’t deduct as interest on a student loan any interest paid by your employer after March 27, 2020, and before January 1, 2026, under an educational assistance program. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are both tied to these qualified expenses.
Expenses That Don’t Qualify
You may be able to claim an education credit if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. For 2024, the credits are based on the amount of adjusted qualified education expenses paid for the student in 2024 for academic periods beginning in 2024 or beginning in the first 3 months of 2025. Adjusted qualified education expenses (AQEE) are the total qualified expenses reduced by any tax-free education assistance. If an education credit or deduction is claimed for the student, then the total expenses must also be reduced by the amount of expenses taken into account in determining the credit or deduction. Scholarships and fellowship grants that the student includes in income don’t reduce the student’s qualified education expenses available to figure your lifetime learning credit. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional lifetime learning credit and may cause your tax refund to decrease or the amount of tax you owe to increase.
The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren’t used for both benefits. The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. The maximum amount of lifetime learning credit you can claim for 2024 is $2,000 (20% × $10,000). See Effect of the Amount of Your Income on the Amount of Your Credit, later.
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The Lifetime Learning tax credit represents 20% of a student’s eligible expenses for higher education, up to $10,000 per year. This means that the taxpayer can use the Lifetime Learning Credit to reduce their total tax bill by up to $2,000 per year. If you were under age 24 at the end of 2024 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, you can claim your allowed credit, figured in Part II, only as a nonrefundable credit to reduce your tax.
During 2024, you paid $800 of interest on a qualified student loan. Your 2024 MAGI is $180,000 and you are filing a joint return. You must reduce your deduction by $400, figured as follows. The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $80,000 and $95,000 ($165,000 and $195,000 if you file a joint return).
- Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax.
- The interaction between scholarships and qualified expenses can affect tax credit eligibility.
- If you or the student takes a deduction for higher education expenses, such as on Schedule C (Form 1040), you cannot use those same expenses in your qualified education expenses when figuring your education credits.
- Judy could claim the $900 lifetime learning credit and the tax liability after credits would be $833.
Glenda pays the tuition for the 2025 spring semester in December 2024. Because the tuition Glenda paid in 2024 relates to an academic period that begins in the first 3 months of 2025, the eligibility to claim an American opportunity credit in 2024 is determined as if the 2025 spring semester began in 2024. For 2024, you may be able to claim a credit of up to $2,500 for adjusted qualified education expenses paid for each student who qualifies for the American opportunity credit.
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Both of these credits have different rules that can affect your eligibility to claim a specific credit. If you claim the American opportunity credit even though you’re not eligible, you may be banned from claiming the credit depending on your conduct. See the Caution statement under American Opportunity Credit, later. For the latest information about developments related to Form 8863 and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form8863. Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.
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Otherwise, the account owner is listed as the recipient of a QTP distribution. The beneficiary should always be listed as the recipient of an ESA distribution. To learn more about how these credits coordinate with the Pell Grant, see Internal Revenue Service Publication 970, page 13. You may be able to reduce your tax liability by claiming the otherwise tax-free grant as income, if the money was used to pay for something like room and board, that is not a qualified education expense. With an online account, you can access a variety of information to help you during the filing season. You can get a transcript, review your most recently filed tax return, and get your adjusted gross income.
Before the student can determine the taxable part of their QTP distribution, they must reduce their total qualified education expenses by any tax-free educational assistance. Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. For purposes of QTPs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses.
Determine if your income exceeds the phase-out limits
You never pay tax on the basis (the amount of money you invested in the plan). IRS Form 1098-T, Tuition Statement, provided by educational institutions, is a key document. It details tuition and fees billed, as well as scholarships or grants received.
Coverdell Education Savings Account (ESA)
Your child will include the $4,000 applied to room and board in gross income, and it will be treated as earned income for purposes of determining whether your child is required to file a tax return. If the $4,000 is your child’s only income, your child won’t be required to file a tax return. You may be able to increase the combined value of an education credit if the student includes some or all of a scholarship or fellowship grant in income in the year it is received. For each student, reduce the qualified education expenses paid in 2024 by or adjusted qualified education expenses (see instructions) on behalf of that student under the following rules. A semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI.