Education

Don't misunderstand.  If you claim the Education Credit on your return for your dependent daughter, then you are claiming her "qualified" education expenses for the Education Credit.  If she received scholarships or section 529 distributions in excess of qualified education expenses, she will claim that taxable income on her return generally.

It is generally more beneficial that way anyway because it will be less tax liability on claiming some scholarship or taxable

Qualified education expenses.

For purposes of tax-free scholarships and fellowship grants, these are expenses for:

• Tuition and fees required to enroll at or attend an eligible educational institution; and

• Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Expenses that don't qualify.

Qualified education expenses don't include the cost of:

• Room and board,

• Travel,

• Research,

• Clerical help, or

• Equipment and other expenses that aren't required for enrollment in or attendance at an eligible educational institution.

If you go to IRS Publication 970, you will find that the qualified education expenses for the 529 monies are different than the qualified education expense for scholarship and fellowship grants...

What is the tax benefit of a QTP?

No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. See Are Distributions Taxable , later, for more information.

.

Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. 

These are qualified Education Expenses for QTP (529) plan funds:

Qualified Higher Education Expenses

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, defined later.

1. 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.

2. 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.

3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined later).

   The expense for room and board qualifies only to the extent that it isn't 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.

   You may need to contact the eligible educational institution for qualified room and board costs.

    

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)

5. The expenses for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.

6. No more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary’s sibling. A sibling includes a brother, sister, stepbrother, or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary. You can’t deduct as interest on a student loan (see chapter 4) any amount paid from a distribution of earnings from a QTP after 2018 to the extent the earnings are treated as tax free because they were used to pay student loan interest.

Please refer to IRS Publication 970 for additional information on how to coordinate the use of different education distributions and scholarship for different expenses.

For additional information, please refer to the following link:

IRS Publication 970 Tax Benefits for Education

[Edited 04/08/2021|6:30 pm pst]