Basically, scholarships/grants can only be used to pay for the qualified education expenses of tuition, books, and lab fees. That's it, and there are no exceptions. But the category of "lab fees" is rather broad.
Out of Pocket expenses can only be used to pay for the qualified education expenses identified above. No exceptions either.
Now, per the IRS rules, money from a 529/QTP plan can be used to pay for the qualified education expenses
of tuition, books and lab fees, *and* for room and board provided of course that
room and board is necessary for the student’s education. It’s all tax free if used for those expenses too.
But on the room and board part, you have to be careful if the student will be living off-campus. Also,
don’t forget the “board” part. That would include the cost of food. But again I reiterate, you have to be careful here.
If the school offers on-campus housing, but the student chooses to live off campus, then you can only
claim the expense of the “room” part of “room and board” that is the lesser. For example, if it would
cost $1500 a month to live on campus in campus provided housing, but the student by their choice lives
off campus and pays $2000 a month for rent and utilities, then you can only claim $1500 a month, since
living on-campus would be cheaper. Now if the student lives off-campus because on-campus housing is
not available, then you can claim the higher off-campus costs. However, you will need to obtain a letter
from the school on school letterhead signed by a school official that specifically states on-campus
housing is not available and directs that the student *must* make other housing accommodations. This
does not mean the student can go out and rent a $10,000 a month penthouse suite and deduct that
amount from taxable income either. Cost must be reasonable and within the acceptable range for the
locality where the college is located.
On the “board” part of room and board, most colleges nowadays offer a food plan. In fact, they usually
have more than one plan the student can choose, depending on their need. There are even some
colleges that “require” unmarried students living on-campus in campus housing to purchase a school
sponsored food plan. I know FSU has that requirement now. The cheapest food plan at FSU for a
semester cost $624 and includes $150 in “flex bucks”.
That equates to about 3 meals a week for the semester. This type of plan is good for a student who
already lives with their parents in the local area where they were raised, and maybe they only need to
eat lunch at school three times a week or so, between classes. That way, they don’t have to deal with
the traffic going to and coming from home for lunch on those days where classes cut across a meal time.
The “flex bucks” are basically credits that can be used at any food establishment on campus, at any time
during the semester. So if you don’t want to walk the three blocks to the dining facility one evening, you
can order a pizza from the on-campus Papa Johns and have it delivered to your dorm room or other oncampus
location, and pay for it with your flex bucks upon delivery.
The most expensive plan costs $2000 per semester and includes $150 in flex bucks. This plan has an
unlimited number of meals in the on campus dining facilities. It also includes three guest passes good for
the semester. That way, if a parent decides to visit you on campus, you two can have lunch or dinner
together at any on campus dining facility, and with the guest pass their meal as the guest of a
student is already paid for. This type of plan is ideal for the student who lives on campus and “home”
may be several hundred miles away. With this plan, they can go eat any meal on any day, including days
they are not attending classes, as well as weekends and holidays. Per IRS guidelines, school sponsored
food plans can be paid for with 529 funds, thus making the funds distributed and used for that purpose
If the student is living off campus and not required to participate in a meal plan, when it comes to using
529 funds for room and board, the student needs to understand that doesn’t mean they can spend
$1000 a month for steak and lobster tails for three meals a day, 7 days a week, and expect such a claim
is going to fly on the tax return. Not gonna happen. The IRS will audit you faster than you can say “who
do I make my penalties and fines check out to?”
Generally, if the student is off base, then when it comes to housing they can only claim the lesser of
either what they actually pay for rent and utilities, or what the school would charge if they lived in
campus housing. When it comes to the board part of room and board, they can only claim the lesser of
either what they actually pay (and can prove with receipts) for the food they buy, or what the school
would charge for a meal plan *that would meet the students needs*. So don’t just assume you can use
the pricing the most expensive plan offered either. The only way they can claim the higher costs, if
living and shopping for food off campus, is if the campus does not have housing available (and you can
prove it with a letter from the school stating so) and if eating on campus is not conducive to the primary
reason why the student is there in the first place (which is to learn and get their degree or certification.)
So just because you may have a letter verifying that campus housing is not available, that does not
automatically mean you can claim the higher costs of food purchased off campus. Even so, those costs
must be within reason. Eating one’s meals out at a restaurant every day can get quite costly, and I can
assure you the IRS will not buy into such a claim. As for the food allowance there are established perdiems.
But the allowed per-diem amounts vary widely, as it depends on where the student is attending
college and the cost of living in that area.
I know back when one of my kids was at FSU the maximum per-diem amount came to around $600 a
month. But realistically my daughter never spent more than $250 a month for her food for any of the 4
month semesters she was attending. Being a cook at heart, she ate well while at college too! Heck, my
wife and I could not possibly eat $600 of food in a month, even if we tried with steak and lobster tail and
every meal! So keep it real folks. If you don’t keep it real, you can rest assured that the IRS will “make it
real” with an audit about 24-36 months down the road after you’ve filed that tax return.
Finally, under no circumstances are transportation costs deductible for education. So please don't even try it. If you do, the flags will go up and the audit letters will start filling your mailbox.
Restaurant meals and groceries are not deductible education expenses.
QUALIFIED EDUCATION EXPENSES
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It does not matter if it was spent on room and board, car payments, or going on vacation. Any scholarship not used for tuition is taxable. So for determining if a scholarship is taxable, it does not matter if those things are considered as room and board or not.
As @xmasbaby0 pointed out, if you had a college savings plan (such as a "529 plan"), then "room and board" expenses can be applied to that. If you are referring to a college savings plan (such as a "529 plan"), then the answer is "sort-of". Yes, that is counted as "room and board", but ONLY UP TO the amount of amount of "room and board" the college would charge for on-campus "room and board".
My son has a 529 plan. He lives on campus but there are no food plans to purchase. All of his food is groceries or occasionally a breakfast out. Can we use the 529 money for that purpose? We had to take a loan for the Room and Board for the year as we did not have enough to cover the year of expenses. His state and local scholarships paid for his tuition.
Yes, you can use 529 plan money to pay for off campus food.
As long as the student is enrolled at least half time, the IRS will approve room and board expenses for off-campus housing. However, those expenses must not exceed the room and board allowance included in the "cost of attendance"*, as determined by the college or university.
The amount allowable for room and board costs is available from the school's financial aid or admissions office, and it can often be found online.
*"cost of attendance" is essentially the amount the school awards in full scholarships
Can I use a local schools Room and Board data to base my estimates if the current school my student is attending does on have that data. Fyi, they explicitly indicate on the catalog the following:
"...The Student Housing Program is available to assist our student with their housing search. The institute does not own or control any residential student housing, nor does the school have the responsibility to assist students in finding housing..."
Hence, I have inquired about R&B data, but they have not published it and as part of my discussions with them they have no hard data for the students. Most students are local, but we are from out of state. Hence, we need R&B which leads me to my aforementioned question.
Q. Can I use a local school's Room and Board data to base my estimates if the current school my student is attending does on have that data.
The rule is: the lower of your actual cost or the school's "cost of attendance" (see above for definition). A different local school's numbers should be sufficient.