Chapter 33
Educational Tax Benefits

The tax law provides several tax benefits for people attending school. If you can take advantage of them, you are in effect receiving a government subsidy that lowers the cost of education.

The American Opportunity Tax Credit, the Lifetime Learning credit, the student loan interest deduction, and state-sponsored college tuition programs and Coverdell ESAs can provide substantial tax savings. The above-the-line deduction for higher education tuition and fees may be available if you do not claim an American Opportunity or Lifetime Learning credit. However, these tax benefit provisions are hedged with restrictions, such as income-based limitations, that may bar or limit their availability.

33.1 Scholarships and Grants

Scholarships and fellowships of a degree candidate are tax free to the extent that the grants pay for tuition and course-related fees, books, supplies, and equipment that are required for courses. Amounts for room, board, travel, and incidental expenses do not qualify and must be reported as income. If you are not a candidate for a degree (see the degree test below), your entire grant is taxable.

Generally, you must pay tax on grants or tuition reductions that pay for teaching, research, or other services required as a condition of receiving the grant. This is true even if all degree candidates are required to perform the services. Thus, if you are a graduate student and receive a stipend for teaching, those payments are taxable, subject to withholding, and reported by the school on Form W-2. Similarly, no tax-free exclusion is allowed for federal grants where the recipient agrees to do future work with the federal government. However, a grant or tuition reduction that represents payment for teaching, research, or other services is not taxable if it is paid under the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.

Degree test. Scholarships given to students attending a primary or secondary school, or to those pursuing a degree at a college or university, meet the degree test. Also qualifying are full-time or part-time scholarships for study at an educational institution that (1) provides an educational program acceptable for full-time credit towards a higher degree or offers a program of training to prepare students for gainful employment in a recognized occupation and (2) is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency.

Pell grants. Pell grants are need-based grants that are subject to the above rules for scholarships. Thus, they are tax free to the extent they are used for tuition and course-related fees, books, supplies, and equipment that are required for courses.

33.2 Tuition Reductions for College Employees

Free or partially free tuition for undergraduate studies provided to a faculty member or school employee is generally not taxable. The tuition reduction may be for education at his or her own school or at another school. Tuition benefits may be taxable to highly compensated employees if the tuition plan discriminates in their favor. Tuition reductions that represent compensation for services are taxable unless paid under the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.

Tax-free tuition benefits may also be provided to the employee’s spouse, dependent child, a former employee who retired or left on disability, a widow or widower of an individual who died while employed by the school, or a widow or widower of a retired or disabled employee.

A child under the age of 25 qualifies for a tax-free tuition reduction if both parents have died and one of the parents qualified for tax-free tuition benefits. If the child is age 25 or over, tuition reductions are taxed even if both parents are deceased.

A tuition reduction for graduate studies may also be tax free; see the Caution on this page.

33.3 How Fulbright Awards Are Taxed

Most Fulbright awards are treated as taxable wages for teaching, lecturing, or research. If you are abroad over a year, you may be able to claim the foreign earned income exclusion to avoid tax on the grant (Chapter 36). If you do not qualify for the exclusion, your overseas stay is temporary, and you intend to return to your regular teaching position in the United States, you may deduct the cost of your travel, meals, and overseas lodgings as miscellaneous itemized deductions subject to the 2% of AGI floor (Form 2106 and Schedule A of Form 1040). Foreign income taxes paid on taxable Fulbright wages are eligible for the foreign tax credit.

33.4 United States Savings Bond Tuition Plans

Consider the use of Series EE bonds (30.12) or I bonds (30.13) to fund part of a college savings program. You can defer the interest income until final maturity (30 years) or report the interest annually. At redemption, the interest is not subject to state or local tax. For bonds purchased in your child’s name, having your child report the interest annually may be advisable where it can be offset by the child’s standard deduction or itemized deductions. To the extent interest is offset each year, it escapes tax (4.29).

Interest exclusion may be available if you redeem EE bonds issued in your own name after 1989 or I bonds. If you purchased I bonds (30.13) or post-1989 EE bonds (30.12) in your own name or jointly with your spouse and have been deferring the reporting of interest income, you may be able to exclude accumulated interest from federal tax in the year you redeem the bonds if in that year you pay tuition and enrollment education fees or you contribute to a Coverdell ESA (33.11) or qualified tuition program (QTP) (33.5). The exclusion, claimed on Form 8815, is subject to several limitations as discussed in the following paragraphs.

Who qualifies for the exclusion. You must have been age 24 or over before the month in which the qualified bonds were purchased, and the bonds must have been issued solely in your name or in the joint names of you and your spouse. You may not claim the exclusion for bonds bought in your child’s name or owned jointly with your child. In the year the bonds are redeemed you must pay tuition and enrollment fees or contribute to a Coverdell ESA or QTP for yourself, your spouse, or your dependents for whom you claim an exemption (21.1) on your return. Thus, grandparents who redeem bonds that they bought to fund the college education of their grandchildren may not claim the exclusion unless the grandchildren are their dependents in the year the bonds are redeemed. If you are married, you must file a joint return for the year you redeem the bonds; married persons filing separately are not eligible for the exclusion.

If these tests are met, and your income does not exceed the annual limit for the exclusion, you may claim a full or partial exclusion, depending on whether your qualified education expenses exceed the bond redemption proceeds, as discussed in the following paragraphs.

Excludable amount and phaseout rule. The tax-free amount of EE or I bond interest is figured on Form 8815. Even if you pay qualified higher educational expenses in the year you redeem the bond, your potential interest exclusion may be limited or barred because: (1) the qualified expenses must be reduced by nontaxable educational benefits received in the year the bond is redeemed, (2) your potential exclusion is reduced or eliminated under the phaseout rule based on modified adjusted gross income (MAGI), or (3) you are married filing separately, in which case you are not allowed an exclusion regardless of your income or amount of expenses.

Qualified higher education expenses include the following expenses that you pay in the year of redemption for yourself, your spouse, or dependents for whom you claim an exemption on your tax return (21.1): (1) tuition and fees required for enrollment at a college, university, or vocational school that meets federal financial aid standards, and (2) contributions to a Coverdell. ESA or QTP. Room and board are not eligible expenses.

On Form 8815, qualified expenses must be reduced by the amount of any nontaxable scholarship or fellowship grant, tax-free employer-provided educational assistance, educational expenses taken into account when figuring the American Opportunity credit or Lifetime Learning credit (33.7), and educational expenses taken into account when figuring the tax-free portion of a distribution from a qualified tuition plan (33.6) or a Coverdell ESA (33.11).

If after the required reductions, qualified expenses equal or exceed the redemption proceeds, 100% of the interest is potentially excludable, subject to the phaseout based on MAGI. If the redeemed amount exceeds the amount of educational expenses (after any required reduction), the excludable amount is based on the ratio of expenses to the redemption amount and the phaseout computation.

A full interest exclusion is allowed only to persons with MAGI below a phaseout threshold. For 2017, the MAGI phaseout ranges are:

* $78,150 to $93,150 for single persons, heads of household, and qualifying widows/widowers

* $117,250 to $147,250 for married persons filing jointly

No exclusion is allowed if MAGI equals or exceeds the $93,150 or $147,250 limit. For purposes of applying the phaseout, MAGI is generally your regular adjusted gross income plus the interest on the redeemed EE or I bonds, student loan interest (33.14), or tuition and fees (33.13) that you deduct, and foreign income items and employer-provided adoption assistance that you excluded from income. See the Form 8815 instructions.

33.5 Contributing to a Qualified Tuition Program (Section 529 Plan)

Qualified tuition programs (QTPs), also known as Section 529 plans, allow you to either prepay a designated beneficiary’s future qualified higher education expenses or to establish a savings plan from which such expenses can be paid. States can sponsor savings plans and prepayment plans. Private colleges, universities, and vocational schools can set up prepayment plans only. Distributions are generally tax free to the extent of qualified higher education expenses (33.6).

In a prepayment plan, a parent or other relative can purchase tuition credits or certificates as a prepayment of a child’s future college costs. Where the child will not start college for many years, prepaying tuition according to a set schedule can avoid higher inflation-based tuition costs down the road. In a state-sponsored savings plan, annual contributions are made to an account for the benefit of the designated beneficiary, earnings accumulate tax-free, and withdrawals can later be made to pay the beneficiary’s qualified higher education costs.

Contribution details and other plan terms including investment options can vary greatly from plan to plan. If you are considering an investment, you should contact the state or educational institution maintaining the plan for details.

Contributions are not deductible for federal tax purposes. However, a state income tax deduction may be available to residents who contribute to a state-sponsored QTP.

You may contribute to both a QTP and a Coverdell ESA (33.11) in the same year on behalf of the same beneficiary.

Gift tax consequences. A contribution to a QTP is treated as a completed gift of a present interest passed from the contributor to the beneficiary at the time of contribution. Contributions are eligible for the annual gift tax exclusion, which applies separately to each individual to whom you make gifts during a year. For 2017, you can make gifts of up to $14,000 per person that are free from gift tax under the annual exclusion, but if you are married and your spouse elects to split your gift on Form 709, the per-donee exclusion doubles to $28,000 (39.2). If your gift exceeds the annual exclusion, a special gift tax rule allows you to elect on Form 709 (annual gift tax and generation-skipping transfer tax return) to treat contributions of up to five times the annual exclusion as if they were made over five years. Thus, for 2017, you can elect to treat QTP contributions of up to $70,000 (five times the $14,000 exclusion) as if the contributions were made ratably over five years, and this is doubled to $140,000 if your spouse elects to split your gifts. If the election is made, the reportable gift on Form 709 for 2017 is (1) 20% of the QTP contributions up to the $70,000/$140,000 limit, allowing that amount to be offset by the annual exclusion, plus (2) the amount of any contribution exceeding the $70,000/$140,000 limit.

33.6 Distributions From Qualified Tuition Programs (Section 529 Plans)

The portion of a QTP distribution that is allocable to a recovery of contributions to the plan (basis) is not taxable. This is true whether the plan is a state QTP or a private educational institution QTP. A beneficiary who receives a distribution of earnings from a state or private QTP to pay college costs does not have to include the earnings in income if the total distribution does not exceed “adjusted qualified higher education expenses” for the year, as discussed below.

On Form 1099-Q, which you should receive from the plan paying the distribution, the gross distribution in Box 1 is divided between earnings in Box 2 and the return of investment (or basis) in Box 3.

Qualified higher education expenses. For purposes of figuring if part of a distribution from a QTP is taxable (see below), qualified higher education costs are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, which is any college, university, vocational school, or other postsecondary school eligible to participate in federal student aid programs. Qualified expenses also include the purchase of computer or peripheral equipment, software, and internet access.

Reasonable room and board costs for a designated beneficiary who is at least a half-time student also qualify. The limit that is considered reasonable for room and board expenses is the greater of the room and board allowance determined by the eligible institution for federal financial aid purposes or the actual amount charged for a student residing in housing that is owned and operated by the eligible educational institution. In the case of a special needs beneficiary, the definition of qualifying expenses includes all expenses that are necessary for that person’s enrollment or attendance at an eligible institution.

Figuring the taxable portion of a distribution from a QTP. Whether or not a distribution of earnings from a QTP is taxable depends on whether the distribution exceeds adjusted qualified higher education expenses. The qualified higher education expenses paid during the year must be reduced by any tax-free assistance such as scholarships, Pell grants, veterans’ assistance, and employer-paid expenses. If an American Opportunity or Lifetime Learning credit is claimed for the year of the distribution, the expenses taken into account in determining the credit also reduce qualified higher education expenses. If after the reductions the resulting adjusted qualified higher education expenses equal or exceed the total QTP distribution, the entire distribution is tax free. If after the reductions the resulting adjusted qualified higher education costs are less than the total QTP distribution, part of the earnings (shown in Box 2 of Form 1099-Q) is taxable. The Example below illustrates the computation of the taxable amount.

If earnings are taxable, a 10% “additional tax” may also be due, but there are exceptions for distributions that are taxable merely because qualified expenses had to be reduced by tax-free education assistance or expenses taken into account in figuring an American Opportunity or Lifetime Learning credit. The additional tax is figured on Form 5329.

Coordination with Coverdell ESA distributions. If distributions from both a QTP and a Coverdell ESA (33.11) are received in the same year and the total distributions exceed the adjusted qualified higher education expenses, the expenses must be allocated between the distributions. Assume that in the above example Marta had withdrawn $3,000 from her QTP and $600 from her Coverdell ESA instead of taking the entire amount from her QTP. Marta would allocate $1,250 of the expenses to the QTP distribution ($3,000 QTP / $3,600 total distribution × $1,500 expenses = $1,250), and $250 of the expenses to the ESA ($600 ESA/$3,600 distribution × $1,500 expenses = $250). She would then figure the taxable portion of earnings from each distribution based on the allocable $1,250 or $250 of expenses.

Contributor’s loss on QTP investment. If the entire account is distributed and the total investment in the account has not been recovered, the contributor may be able to claim a loss. However, the loss is a miscellaneous itemized deduction subject to the 2% of AGI floor on Schedule A, Form 1040.

Changing the designated beneficiary or rollover of QTP distribution. The QTP owner can instruct the trustee of the account to change the designated beneficiary with no tax consequences. Similarly, a distribution from a 529 plan can be rolled over tax free to a different plan for the same beneficiary within 60 days after receipt of the distribution, or the rollover can be to a QTP for a member of the original beneficiary’s family, including his or her spouse. For each beneficiary, only one rollover is allowed within a 12-month period.

33.7 Education Tax Credits

There are two tax credits for higher education tuition and qualified fees: The American Opportunity credit and the Lifetime Learning credit. Both credits are figured on Form 8863. You may not claim both credits for the same student for the same year.

The maximum American Opportunity credit is $2,500 per eligible student for qualified expenses in the first four years of post-secondary education. 40% of the credit is generally refundable, meaning that it is allowed even if it exceeds your tax liability. See 33.8 for details on the American Opportunity credit.

Unlike the American Opportunity credit, the Lifetime Learning credit may be claimed for higher education costs beyond the fourth year of post-secondary education and for non-degree courses that enable the student to acquire or improve job skills. Only tuition and fees/expenses required for enrollment or attendance qualify. The maximum Lifetime Learning credit is $2,000 annually, regardless of how many students you pay expenses for. See 33.9 for details on the Lifetime Learning credit.

A phaseout rule based on modified adjusted gross income (MAGI), may limit or even eliminate both credits. However, the American Opportunity credit phases out over a higher MAGI range (33.8) than the Lifetime Learning credit (33.9).

Some of the qualification rules for the American Opportunity and Lifetime Learning credits are the same and these are discussed below.

Rules Applicable to Both the American Opportunity Credit and Lifetime Learning Credit

Married persons filing separately are not eligible. If you are married at the end of the year, you must file jointly to claim either the American Opportunity credit or the Lifetime Learning credit.

Borrowed funds used to pay expenses. You can claim either the American Opportunity credit or the Lifetime Learning credit for eligible expenses paid with loan proceeds. If loan proceeds are sent directly to the educational institution, they are not considered paid until the institution credits the student’s account.

Prepaid expenses. Your American Opportunity or Lifetime Learning credit for 2017 is based on qualified expenses you paid in 2017 for academic periods beginning in 2017, as well as 2017 payments of qualified expenses for academic periods beginning in the first three months of 2018. If you made a payment in 2017 for academic periods beginning after March 2018, the payment is not eligible for a 2017 credit and it also will not be eligible for a 2018 credit.

Eligible students at eligible educational institutions. To claim an American Opportunity credit or a Lifetime Learning credit you must pay qualified expenses for yourself, your spouse, or dependents claimed as exemptions on your return. The expenses must be for courses at eligible educational institutions. Specific student eligibility requirements for the American Opportunity credit are discussed at 33.8. An eligible educational institution is any accredited public, nonprofit, or proprietary college, university, vocational school, or other postsecondary institution eligible to participate in the student aid programs administered by the U.S. Department of Education.

Qualified expenses. For both credits, qualified expenses include tuition, student activity fees that are required of all students for enrollment or attendance, and course-related books, supplies, and equipment that must be purchased from the educational institution as a condition of enrollment or attendance. Other required course materials, such as books or equipment bought privately, qualify for the American Opportunity credit but not the Lifetime Learning credit. Expenses for sports or hobby-related courses that are not part of the student’s degree program do not qualify for the American Opportunity credit but such non-degree courses qualify for the Lifetime Learning credit if they help the student acquire or improve job skills. Room and board, insurance, medical expenses, transportation, and other personal expenses are not qualified expenses for either credit.

For purposes of figuring either credit, qualified expenses must be reduced by tax-free scholarships, Pell grants, educational assistance from the VA (Department of Veterans Affairs) or employer-provided educational assistance (3.7).

Caution: On Form 1098-T for 2017, the educational institution may report to the enrolled student either the aggregate payments received in 2017 (Box 1) or the aggregate amounts billed in 2017 (Box 2) for qualified tuition and related expenses. The Box 1 or Box 2 amount is after any reduction for reimbursements or refunds made in 2017. Any scholarships or grants that could reduce the allowable credit are shown in Box 5. Note that even if the Form 1098-T reports the amounts billed (Box 2), your credit for 2017 must be based on payments you actually made in 2017, or payments made by your child or a third party that you are deemed to have paid (see next paragraph), which may not be reflected on Form 1098-T. Starting with Forms 1098-T for 2018, educational institutions can only report payments actually received for qualified tution and related expenses; the option to report the amounts billed will no longer be allowed and educational institutions that do not provide the required “aggregate amounts received” will be subject to a penalty.

Who can claim a credit for expenses paid by your child or by a third party? A dependent’s expenses are treated as the expenses of the taxpayer claiming an exemption (21.1) for the dependent. For example, if your child is an eligible student and pays qualified expenses, and you claim an exemption for your child as a dependent on your tax return, only you can claim a credit for his or her expenses. Because you claim the child as your dependent, his or her payment of qualifying expenses is treated as your payment.

If a third party, such as the child’s grandparent, pays tuition and related expenses for the child directly to a college, the student is treated as receiving the payment from the other person and making the payment to the school. If you claim a dependency exemption for your child, you treat the expenses as your own and may base a credit on the expenses. If the grandparent qualifies for and claims the dependency exemption, the grandparent could use the expenses to claim a credit. The child can claim a credit based on the payment only if no one claims him or her as a dependent.

Qualified expenses paid directly to a school for a dependent under a court-approved divorce decree are also treated as paid by the dependent.

Waiving exemption deduction for your child so child can claim credit. Your child may claim a credit if you are eligible to claim an exemption for him or her as your dependent (21.1) but you do not do so. If you would not be allowed a credit for your dependent child’s expenses because of the MAGI phaseout (see 33.8 for American Opportunity credit and 33.9 for Lifetime Learning credit), and your child has tax liability against which the credit may be claimed, you can forego claiming the child as a dependency exemption on your return, which would allow the credit to be claimed on the child’s return. However, if the child could be subject to the kiddie tax, as is true for most students under age 24 (24.2), then even if the kiddie tax does not actually apply because the child’s investment income does not exceed the $2,100 floor, the child cannot claim the refundable American Opportunity credit (33.8); his or her entire credit will be treated as nonrefundable.

Make alternative tax calculations to determine whether an exemption for you or a credit for your child would produce the larger overall tax savings.

Double benefits not allowed. You may not claim an American Opportunity credit and the Lifetime Learning credit for the same student for the same year. If you claim either credit, you may not claim the above-the-line tuition and fees deduction (33.12) for the same student for the same year.

You may be able to receive a tax-free distribution from either a Coverdell ESA or a state qualified tuition program (QTP) in the same year that you claim an American Opportunity credit or Lifetime Learning credit. The expenses taken into account as the basis of an American Opportunity or Lifetime Learning credit reduce eligible expenses for purposes of figuring the tax-free part of an ESA or state QTP distribution.

Recapture of credit. If you claim a credit and after you file your return for that year you receive tax-free educational assistance for the prior year or receive a refund of an expense used to figure the prior-year credit, you have to refigure the original credit. If the refund or assistance would have reduced the original credit, the amount of the reduction must be added to your tax liability for the year you receive the refund or assistance; see the Form 8863 instructions.

33.8 American Opportunity Credit

You may claim an American Opportunity credit on Form 8863 if you pay qualified tuition and fees for an eligible student in the first four years of college or other post-secondary institution and the credit is not barred by the phaseout rule (see below).

A student is an eligible student for purposes of the credit only if all of the following requirements are met: (1) the student must be enrolled in one of the first four years of postsecondary education, (2) the student is enrolled in a program that leads to a degree, certificate, or other recognized educational credential, (3) the student is taking at least one-half of the normal full-time workload for his or her course of study for at least one academic period beginning during the calendar year, (4) both the taxpayer claiming the credit and the student have a TIN by the due date of the return (see the Law Alert on this page), and (5) the student does not have any felony conviction (state or federal) for possessing or distributing a controlled substance as of the end of the tax year.

Even if the above five requirements are met, a student is not eligible for the American Opportunity credit if the credit, together with its predecessor the Hope Scholarship credit, was claimed for any four years preceding the current year. For example, a 2017 American Opportunity credit cannot be claimed by anyone for a student if the American Opportunity credit and/or the Hope Scholarship was claimed for that student for any four tax years before 2017.

To claim the maximum credit of $2,500 for an eligible student, you must pay at least $4,000 in qualified expenses for that student. For each eligible student, the American Opportunity credit is 100% of the first $2,000 and 25% of the next $2,000 (for a maximum of $2,500) of tuition, student-activity fees that are required as a condition of enrollment or attendance, and books, supplies, and equipment needed for courses. The books, supplies, and equipment qualify for the credit whether or not they had to be purchased from the educational institution.

Keep in mind that the qualified expenses eligible for the credit are reduced by tax-free educational assistance, including the tax-free part of a Pell grant or other scholarship or fellowship, tax-free employer-provided assistance (3.7), and VA educational assistance. The reduction of the expenses by the tax-free educational assistance could eliminate much or all of the credit. You have the option of allocating part of a Pell grant to room and board, or other education costs that do not qualify for the credit. The amount allocated to the room and board would be included in the student’s gross income rather than be a tax-free scholarship, but the allocated amount would not reduce the expenses eligible for the credit. See the instructions to Form 8863 for further details.

Phaseout of credit depends on MAGI. The tentative credit (100% of the first $2,000 and 25% of the next $2,000 of qualified expenses) is phased out over a modified adjusted gross income (MAGI) range of $80,000–$90,000 if you are single, head of household, or a qualifying widow/widower, or $160,000–$180,000 if married filing jointly. You are not allowed any credit if your MAGI is $90,000 or more, or $180,000 or more on a joint return. The example below illustrates the application of the phaseout.

Modified adjusted gross income is the same as adjusted gross income (AGI) unless you are claiming the foreign earned income exclusion (36.3) or foreign housing exclusion or deduction(36.4), or the exclusions for income from Puerto Rico (36.10) or American Samoa (36.9). If so, adjusted gross income is increased by such amounts on Form 8863.

Refundable and nonrefundable parts of the credit. After applying the phaseout rule, 40% of the allowable credit is refundable, meaning that you claim it on your return as if it were a tax payment, like withholding, that you get back even if it exceeds your tax liability for the year. However, none of the credit is refundable if you are under age 24 with investment income subject to the kiddie tax (24.2).

The balance of the credit (60% unless the kiddie tax applies) is a nonrefundable credit that offsets your regular tax plus AMT (minus certain credits). The Form 8863 instructions have a credit limit worksheet for applying the tax liability limitation.

For example, assume that after applying the phaseout rule, you are allowed a $2,500 credit. 40% of the $2,500, or $1,000, is a refundable credit. The $1,500 balance is a nonrefundable credit that offsets your total tax liability but may not exceed that liability. Assume your regular tax plus AMT liabilities total $1,300. Your nonrefundable credit is reduced from $1,500 to $1,300. You may claim a $1,000 refundable credit and a $1,300 nonrefundable credit. Also see the following example for how the refundable and nonrefundable portions of the credit are figured after application of the phaseout rule.

33.9 Lifetime Learning Credit

You may claim on Form 8863 a Lifetime Learning credit of up to $2,000 for the total qualified expenses paid for yourself, your spouse, or your dependents enrolled in eligible educational institutions (33.7) during the year, subject to the income phaseout (see below). The credit is nonrefundable, meaning that it cannot exceed your regular tax plus AMT liability. In addition to tuition, the only qualified expenses are student activity fees and course-related books, supplies, and equipment that must be paid to the educational institution as a condition of enrollment or attendance.

In contrast to the American Opportunity credit, the Lifetime Learning credit does not have a degree requirement or a workload requirement. The credit may be claimed for one or more courses at an eligible educational institution that are either part of a post-secondary degree program or part of a nondegree program taken to acquire or improve job skills. The Lifetime Learning credit is not limited to students in the first four years of postsecondary education, as is the American Opportunity credit. There is no limit on the number of years for which the Lifetime Learning credit can be claimed.

The Lifetime Learning credit for any year is 20% of the first $10,000 paid in that year for qualified expenses for all eligible students. Thus, the maximum Lifetime Learning credit you may claim for 2017 is $2,000 (20% of $10,000), even if you paid qualified expenses for more than one eligible student. The $2,000 maximum may be reduced because of the income-based phaseout or because the allowable credit (after the phaseout) exceeds your tax liability. Under current law, both the credit percentage (20%) and the expense limit ($10,000) are fixed and not eligible for an inflation adjustment.

For students within the first four years of post-secondary education in 2017, both the Lifetime Learning credit and the American Opportunity credit are potentially available, but you cannot elect both credits for the same student and the American Opportunity credit is more advantageous. For one student, the maximum Lifetime Learning credit is $2,000 and the maximum American Opportunity credit is $2,500, and if you paid qualified expenses for more than one eligible student, the overall Lifetime Learning credit you may claim remains $2,000 regardless of the number of students, whereas the American Opportunity credit is up to $2,500 per eligible student (33.8). In addition, a more favorable phaseout range applies to the American Opportunity credit and 40% of the American Opportunity credit is refundable (33.8), whereas the Lifetime Learning credit is nonrefundable.

Phaseout of credit for 2017. The tentative Lifetime Learning credit (20% of the first $10,000 of qualified expenses) is phased out for 2017 if modified adjusted gross income (MAGI; same definition as at 33.8) is between $56,000 and $66,000 and you file as single, head of household, or qualifying widow/widower, or between $112,000 and $132,000 on a joint return. No credit is allowed for 2017 once MAGI reaches $66,000, or $132,000 on a joint return. The example below illustrates the application of the phaseout.

Tax liability limitation. The Lifetime Learning credit allowed after applying the phaseout rule is a nonrefundable credit that is allowed only to the extent of your regular tax and AMT liability (minus certain credits). The Form 8863 instructions have a credit limit worksheet for applying the tax liability limitation.

33.10 Contributing to a Coverdell Education Savings Account (ESA)

A Coverdell Education Savings Account, or ESA, is a trust or custodial account set up specifically for the purpose of paying the qualified education expenses of the designated beneficiary of the account. A contribution cannot be made for a beneficiary after he or she reaches age 18 unless the beneficiary is a special needs beneficiary, as discussed below. Contributions must be in cash. Coverdell Education Savings Accounts were formerly known as Education IRAs.

Contribution deadline. The deadline for making a contribution for any year is the due date of your return for that year (not including extensions). You can make a contribution to a Coverdell ESA up until April 17, 2018, and designate it as a contribution for 2017.

Two annual contribution limits. The maximum annual cash contribution that can be made for a designated beneficiary is $2,000. The $2,000 limit applies to the total contributions for each designated benficiary for the year. For example, if you and several family members would each like to contribute to a Coverdell ESA for your child, the total amount of 2017 contributions that can be made for your child is $2,000, no matter how many Coverdell ESAs have been set up or how many persons contribute.

Each contributor is also subject to a $2,000 annual contribution limit for each beneficiary, but the $2,000 limit can be reduced by the phaseout rule. The $2,000 per beneficiary limit is reduced if your modified adjusted gross income (MAGI) is between $95,000 and $110,000, or between $190,000 and $220,000 if you are married filing jointly. You may not contribute to any beneficiary’s Coverdell ESA if your MAGI is $110,000 or more, or $220,000 or more if filing a joint return.These phaseout ranges are not adjusted for inflation. For most individuals, MAGI is the same as adjusted gross income (AGI), but if the foreign earned income exclusion or an exclusion of income from Puerto Rico or American Samoa is claimed, the exclusion is added back to AGI.

For example, assume you are single and have MAGI of $96,500 for 2017. Since your MAGI exceeds the phaseout threshold of $95,000 by $1,500 and the phaseout range is $15,000, 10% ($1,500/$15,000) of your contribution limit or $200 (10% of $2,000) is phased out. For 2017, you may contribute up to $1,800 for each Coverdell ESA beneficiary. If you contribute $1,800 for a beneficiary, others can contribute no more than $200 for that beneficiary for that year, as contributions for a beneficiary may not exceed $2,000 from all sources.

The Coverdell ESA beneficiary must pay a 6% excise tax on Form 5329 if total contributions to his or her ESAs for the year exceed $2,000, or the contributions exceed the reduced limits allowed to contributors under the phaseout rule. The penalty is imposed on the beneficiary and not the contributors. The excise tax does not apply if the excess contributions (and any earnings) are withdrawn before the first day of the sixth month (June 1) of the following year. The withdrawn earnings are taxable to the beneficiary for the year in which the excess contribution was made.

Special needs beneficiary. Contributions to a Coverdell ESA for a special needs beneficiary may be made even if he or she is over age 18.

33.11 Distributions From Coverdell ESAs

A designated beneficiary of a Coverdell ESA is not taxed on withdrawals that do not exceed qualified education expenses for that year. If withdrawals were made in 2017 and the total exceeds the qualified education expenses (see below) for 2017, a portion of the withdrawals is taxable to the beneficiary. The distribution will be reported to the beneficiry and the IRS on Form 1099-Q. The taxable portion is the amount of the excess withdrawal allocable to earnings; see the Example below and the worksheet in IRS Publication 970.

Qualified education expenses. In addition to qualified higher education expenses (as defined at 33.6 for QTPs), qualified expenses for ESA distribution purposes include contributions to a QTP (33.5) on behalf of the ESA beneficiary. Also qualifying are elementary and secondary education expenses, kindergarten through grade 12. The elementary or secondary school may be a public, private, or religious school. Eligible expenses for elementary and secondary school students include tuition, fees, academic tutoring, books, supplies, special services for special needs beneficiaries, computers and peripheral equipment, Internet access, and software. Software designed for sports or hobbies must be predominately educational in nature. Qualified expenses also include room and board, uniforms, transportation, and supplementary items and services including extended day programs required or provided by the school.

Coordination with education credits. If an American Opportunity credit or Lifetime Learning credit is claimed for 2017, then in figuring the tax-free portion of a 2017 Coverdell ESA distribution, qualified Coverdell ESA expenses must be reduced by the expenses taken into account when figuring the credit.

Figuring the tax-free and taxable part of a distribution. If the adjusted qualified education expenses (AQEE) of the beneficiary equal or exceed the distribution, the entire distribution is tax free. If a distribution exceeds the AQEE, then part of the earnings included in the distribution is taxable. To determine the amount of AQEE, reduce the total qualified education expenses (defined above) by any tax-free educational assistance such as excludable scholarships, Pell grants, veteran’s educational assistance or employer-provided educational assistance. Any expenses taken into account when figuring an American Opportunity credit or Lifetime Learning credit further reduce qualified expenses. The balance of qualifying expenses after subtracting tax-free educational assistance and credit-related expenses is the beneficiary’s AQEE. The Example below shows how the taxable portion of the distribution is determined when the total distribution exceeds the AQEE.

Additional tax on taxable distributions. Generally, a taxable distribution is subject to a 10% additional tax, which is figured on Form 5329. However, the 10% additional tax does not apply to distributions that are: (1) made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary, (2) made because the designated beneficiary is disabled, (3) taxable because the designated beneficiary received a tax-free scholarship or educational assistance allowance that equals or exceeds the distribution, or (4) taxable only because the qualified ESA education expenses were reduced by expenses used in figuring an American Opportunity or Lifetime Learning credit.

The 10% additional tax also does not apply to the withdrawal of an excess contribution (and allocable earnings before June 1 of the following year.

Age 30 duration rule. If there are assets remaining in a Coverdell ESA when the designated beneficiary reaches age 30, the beneficiary must withdraw the assets within 30 days, unless he or she is a special needs beneficiary. The duration of the account can be extended by changing the designated beneficiary or rolling over the account to a member of the beneficiary’s family who is under age 30; see below.

Rollovers and other transfers. Withdrawn assets may be rolled over tax free from one Coverdell ESA to another for the benefit of the same beneficiary or a member of the beneficiary’s family if the recipient is under age 30. For example, if a beneficiary still has money in his or her account upon graduation from college, the Coverdell ESA can be rolled over tax free to the Coverdell ESA of a younger sibling. The withdrawal is considered rolled over if it is paid to another Coverdell ESA within 60 days. Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or withdrawal. For rollover purposes, members of the beneficiary’s family include the beneficiary’s spouse, child, grandchild, stepchild, brother, sister (and a sibling’s son or daughter), half-sister, half-brother, stepbrother, stepsister, father, mother (and siblings of parents), grandfather, grandmother, stepfather, stepmother, in-laws, the spouses of any of the above, and first cousins.

The designated beneficiary can be changed to a member of the beneficiary’s family (included in the above list) with no tax consequences if the new beneficiary is under age 30. The new beneficiary will have to withdraw the account balance no later than 30 days after reaching age 30, unless he or she is a special needs beneficiary.

If the beneficiary dies before age 30, the account balance generally must be distributed to the beneficiary’s estate within 30 days of the date of death. However, if the Coverdell ESA is transferred to a surviving spouse or other family member (defined above) who is under age 30, the account may be maintained until he or she reaches age 30. The age 30 limitation will not apply if the new beneficiary is a special needs beneficiary.

33.12 Tuition and Fees Deduction

Caution: The deduction for tuition and fees expired at the end of 2016. When this book was completed, it was unclear if Congress would extend the deduction to 2017. Given the possibility that there will be an extension, we are providing below the pre-2017 rules for the deduction on the assumption that those same rules will apply if the deduction is extended. See the e-Supplement at jklasser.com for a legislation update.

If the deduction is extended to 2017, then depending on your income, you may be able to deduct up to $2,000 or $4,000 of qualifying higher education tuition and fees paid during 2017. The deduction is figured on Form 8917 and claimed directly from gross income on Form 1040, whether or not you itemize, or on Form 1040A. You generally must have received a Form 1098-T from an eligible educational institution in order to claim the deduction.

You may not claim the deduction for expenses of a dependent for whom an American Opportunity credit or Lifetime Learning credit is claimed, even if the credit is claimed by someone else. You may not claim the credit for some of an eligible student’s expenses and the deduction for the balance. If you qualify for both, you must choose between the credit and the deduction. Generally, a credit provides a larger tax savings than a deduction, but if you would be allowed only a partial credit because of the income-based phaseout (33.8, 33.9), you may be able to obtain a larger tax benefit from the tuition and fees deduction.

Deduction amount based on income. If you are single, head of household, or a qualifying widow/widower, your maximum tuition and fees deduction is $4,000 if your 2017 modified adjusted gross income (MAGI) does not exceed $65,000, and your maximum deduction is $2,000 if your MAGI is over $65,000 but not more than $80,000. No deduction is allowed if your MAGI is over $80,000.

If you are married filing jointly, your maximum tuition and fees deduction is $4,000 if your MAGI is no more than $130,000, and your maximum deduction is $2,000 if MAGI exceeds $130,000 but is no more than $160,000. No deduction is allowed if MAGI exceeds $160,000.

For purposes of the deduction limitation, MAGI is generally the same as the AGI shown on your return, figured without taking into account the deduction for domestic production activities. You must add back to AGI any exclusion for foreign earned income or income from Puerto Rico or American Samoa, or the foreign housing exclusion or deduction.

Ineligible taxpayers. You may not claim the deduction if you are married filing separately. You are also ineligible if you may be claimed as a dependent on another taxpayer’s return, whether or not you are actually so claimed.

Qualified higher education expenses. Expenses eligible for the deduction are the same as those qualifying for the Lifetime Learning credit (33.9). That is, the deduction is generally limited to tuition and enrollment fees paid to an eligible educational institution for yourself, your spouse or your dependents. Student activity fees and course-related books, supplies and equipment are included only if they must be paid to the school as a condition of enrollment or attendance. Eligible expenses paid in 2017 for an academic period starting in 2017 or in the first three months of 2018 are deductible for 2017. Eligible educational institutions include any college, university, vocational school, or other postsecondary institution eligible to participate in the financial aid programs of the Department of Education.

Claiming a dependent’s expenses. You can deduct your dependent’s eligible expenses if you paid them and you claim an exemption for the dependent. You cannot claim the deduction for expenses paid by the dependent or by a third party on behalf of the dependent, even if you claim the exemption.

Deduction affected by excludable education benefits. Expenses eligible for the deduction are reduced by tax-free scholarships (33.1) and other tax-free educational assistance. If you receive tax-free interest from an EE or I savings bond used for tuition (33.4), the excludable interest reduces the expenses eligible for the deduction. A tax-free distribution of earnings from a Coverdell ESA (33.12) or a QTP (33.6) reduces the deduction-eligible expenses.

Recapture of deduction. If after you file your return on which the deduction was claimed you receive tax-free educational assistance for that year or receive a refund of an expense used to figure the deduction, you may have to repay (recapture) all or part of the original deduction. You recapture the deduction to the extent it gave you a tax benefit by reducing your tax. Refigure the original deduction by reducing it by the refunded amount and also refigure tax liability for that year. To the extent of the increase in tax liability, you must include the refunded amount as “Other income” for the year you receive it; see IRS Publication 970 for further details.

33.13 Student Loan Interest Deduction

If you paid interest on a qualified student loan in 2017, you may be able to claim an above-the-line (directly from gross income) deduction of up to $2,500. You should receive a Form 1098-E (or substitute statement) from each lender that received interest payments of $600 or more from you during the year.

Eligibility for the deduction is phased out for 2017 if you have modified adjusted gross income (MAGI, see below) between $65,000 and $80,000, or between $135,000 and $165,000 if married filing a 2017 joint return. On a joint return, the deduction limit remains $2,500 even if you and your spouse each pay interest on a qualified student loan. The $2,500 deduction limit is set by statute and is not subject to annual inflation adjustments. If you are claimed as a dependent by another taxpayer, or you are married filing separately, you may not claim the deduction regardless of your income. The deduction is claimed on Line 33 of Form 1040 as an above-the-line deduction available even if you do not claim itemized deductions, or Line 18 of Form 1040A.

Qualified loans and expenses. A qualified student loan is one taken out to pay qualified higher education expenses (defined below) for you, your spouse, or a person who was your dependent when you took out the loan. The education expenses must be paid or incurred within a reasonable time before or after the loan was taken out, and the funds obtained must be used toward education furnished while the student is enrolled at least half-time in a program leading to a degree or other recognized educational credential at an eligible educational institution. Eligible institutions are colleges, universities, vocational schools, and other post-secondary educational institutions eligible to participate in Department of Education student aid programs. Graduate school programs are included. Also included are medical internships or residency programs leading to a degree or certificate from an educational institution or hospital offering postgraduate training.

Qualified higher education expenses include tuition, fees, room and board (within the limits at 33.6)), books, equipment, and other necessary expenses such as transportation. These costs must be reduced by:

1. Nontaxable employer-provided educational assistance benefits.
2. Nontaxable Coverdell ESA or QTP distributions.
3. U.S. Savings Bond interest excluded from income because it is used to pay higher education expenses.
4. Qualified tax-free scholarships.
5. Veterans’ educational assistance benefits.

Loan origination fees and capitalized interest (unpaid interest that accrues and is added by the lender to the outstanding balance of the loan principal) can be counted as interest. In general, a payment, regardless of its label, is treated first as a payment of interest to the extent that accrued interest remains unpaid, second as a payment of any loan origination fees or capitalized interest, until such amounts are reduced to zero, and, third as a payment of principal.

Voluntary interest payments are deductible. You can deduct voluntary payments of interest made before your loan has entered repayment status or while you have a repayment deferment.

Dependents and married persons filing separately are ineligible. You may not claim a student loan interest deduction during any year in which someone claims you as a dependent. However, you may deduct interest payments made in a later year when you are no longer claimed as a dependent.

You may not claim a student loan interest deduction for any year in which you are married and file a separate tax return.

Loans that do not qualify for deduction. You may not deduct interest paid on a loan from a relative as student loan interest (5.6).

You may not deduct interest on a loan from a qualified employer plan.

You may not treat interest paid on a revolving line of credit as qualified student loan debt unless you use the funds solely to pay qualified higher education costs.

You may not claim a student loan interest deduction for any amount you may deduct under any other tax law provision, for example home mortgage interest. You also cannot use the deduction if you use part of the borrowed money for purposes other than education, for instance to make improvements to your house.

Phaseout for 2017. The student loan interest deduction is reduced or eliminated if your modified adjusted gross income (MAGI) exceeds phaseout limits. For 2017, the reduction applies if your MAGI is more than $65,000, or more than $135,000 on a joint return. If MAGI is $80,000 or more, or $165,000 or more on a joint return, you may not claim any deduction for 2017; the deduction is completely phased out. MAGI is the same as the adjusted gross income shown on your return (disregarding student loan interest) unless you claim a deduction for tuition and fees (33.13), the exclusion for foreign earned income (Chapter 36), the domestic production activities deduction (40.23), or certain other items of foreign income or expenses were excluded or deducted from your income. Such items generally must be added back to adjusted gross income.

If your MAGI is within the phaseout range, the phased out amount is figured by multiplying your deductible interest (up to the $2,500 limit) by a fraction, the numerator of which is your MAGI minus the phaseout threshold ($65,000, or $135,000 if married filing jointly), and the denominator of which is the phaseout range of $15,000, or $30,000 if married filing jointly. The result is subtracted from the qualifying student loan interest to get the deductible amount; see the Examples below for the computation.

The student loan deduction worksheet in the Form 1040 or Form 1040A instructions can be used to figure the phaseout reduction and the amount of your deduction.

33.14 Types of Deductible Work-Related Costs

If you improve your job or professional skills by attending continuing education or refresher classes, advanced academic courses, or vocational training, you may be able to treat your expenses as a business expense deduction. As a self-employed business owner or professional, allowable expenses are deductible on Schedule C and reduce income subject to self-employment tax (45.1) as well as income tax liability. However, as an employee, the tax benefit of an unreimbursed educational expense deduction is limited because the expenses are miscellaneous itemized deductions, which, together with any other miscellaneous expenses, are deductible on Schedule A only to the extent that the total exceeds 2% of your adjusted gross income; see 19.1.

Keep in mind that tuition and fees (but not transportation and usually not books or supplies) for work-related educational courses may also qualify for the Lifetime Learning credit (33.9) or the tuition and fees deduction, assuming the deduction is extended by Congress (33.12). The Lifetime Learning credit, by reducing tax liability rather than taxable income, is more valuable than a deduction for education costs. However, you may be unable to claim the credit because your income exceeds the phaseout limit for the credit (33.9). The tuition and fees deduction, if available (33.12), is an above-the-line deduction that is allowed even if you do not claim itemized deductions. If you are an employee and are within the income range for the tuition and fees deduction, it is preferable to an itemized job expense on Schedule A that may be limited or eliminated by the 2% floor.

To deduct education costs on Schedule C (self-employed) or Schedule A (employee subject to the 2% of AGI floor), you must show that the following conditions are met:

1. You are employed or self-employed;
2. You already meet the minimum requirements of your job, business, or profession;
3. The course maintains or improves your job or professional skills, or you are required by your employer or by law to take the course to keep your present salary or position; and
4. The course does not lead to qualification for a new profession or business. The cost of courses preparing you for a new profession is not deductible, even if you take them to improve your skills or to meet your employer’s requirements. This rule prevents the deduction of law school costs. Furthermore, the cost of a bar review course or CPA review course is not deductible because it leads to a new profession as an attorney or CPA. If courses lead to qualification for a new business or profession, no deduction is allowed even if you keep your current position.

If your courses meet the above requirements you may deduct the following education costs on Schedule C if self-employed or on Schedule A subject to the 2% of AGI floor if the courses are related to your job:

1. Tuition, textbooks, fees, equipment, and supplies required by the courses.
2. Local transportation costs (33.16).
3. Travel to and from a school away from home, and lodging and 50% of meals while at school away from home (33.16). The IRS will not disallow traveling expenses to attend a school away from home or in a foreign country merely because you could have taken the course in a local school. But it may disallow your board and lodging and expenses at the school if your stay lasts longer than a year.

Further details of the deduction requirements are provided in 33.15.

33.15 Work-Related Tests for Education Costs

Educational costs are not deductible on Schedule C (self-employed) or Schedule A (employee) if you are unemployed or inactive in a business or profession. The cost of “brush-up” courses taken in anticipation of resuming work is also not deductible.

You are not considered unemployed when you take courses during a temporary leave of absence lasting one year or less.

Course must not meet minimum standards. You may not deduct the cost of courses taken to meet the minimum requirements of your job. The minimum requirements of a position are based on a review of your employer’s standards, the laws and regulations of the state you live in, and the standards of your profession or business. That you are presently employed does not in itself prove that you have met the minimum standards for your job.

If minimum standards change after you enter a job or profession, courses you take to meet the new standards are deductible.

Teachers. The minimum educational requirements are those that existed when you were hired. If your employer set no tests fixing a minimum educational level, you meet the minimum requirements when you become a member of the faculty. Whether you are a faculty member depends on the custom of your employer. You are ordinarily considered a faculty member if: (1) you have tenure, or your service is counted toward tenure; (2) the institution is contributing toward a retirement plan based on your employment (other than Social Security or a similar program); or (3) you have a vote in faculty affairs.

That you are already employed as a teacher, with all the responsibilities of a teacher, may not establish that you have met the minimum educational requirements. A school system that requires a bachelor’s degree before granting a permanent teaching certificate may grant temporary or provisional certificates after a person has completed a number of college credits. Renewal of the provisional certificate may be conditioned on the teacher’s continuing education for a bachelor’s degree. In this case, the IRS will disallow a deduction for the educational costs. The minimum requirements are not met until the teacher has the degree.

Course must maintain or improve job skills. To be deductible, the education must maintain or improve your current job skills. That you are established in your position and that persons in similar positions usually pursue such education indicates that the courses are taken to maintain and improve job skills. However, the IRS may not allow a deduction for a general education course that is a prerequisite for a job-related course.

If the courses lead to a change of position or promotion within the same occupation, a deduction for their cost will usually be allowed if your new duties involve the same general type of work. If, as a consequence of taking a job-related course, you receive a substantial advancement and the IRS questions the deduction of the course costs, be prepared to prove that you took the course primarily to maintain or improve skills of your existing job. However, if the course leads to qualification for a new profession, the IRS will disallow a deduction even if the course also improves current job skills.

Courses must not lead to qualification for a new profession. If a course improves your current job skills but leads to qualification for a new profession, the course is not deductible, even if you have no intention of entering that business or profession. For example, a deduction is not allowed for the cost of law school or medical school courses since they prepare you for a new profession. This is true even if you do not intend to practice medicine or law. The IRS with Tax Court approval has also held that a deduction is not allowed for the cost of college courses that are part of a degree program, such as a bachelor of arts or science degree.

If you are practicing your profession, the cost of courses leading to a specialty within that profession is deductible. For example, a practicing attorney may deduct the cost of a master’s of law degree program (LLM).

Further education required by employer or law. If, to retain your present job or rate of pay, your employer requires you to obtain further education, you may deduct the cost of the courses. The fact that you also qualified for a raise in pay or a substantial advancement in your position after completing the courses should not bar the deduction.

The employer’s requirement must be for a bona fide business reason, not merely to benefit you. Only the minimum courses necessary for the retention of your job or rate of pay are considered by the IRS as taken to meet your employer’s requirement. You must show any courses beyond your employer’s minimum requirements were taken to maintain or improve your job skills.

33.16 Local Transportation and Travel Away From Home To Take Courses

If your courses meet the requirements in the preceding two sections (33.14, 33.15), costs of local transportation and travel away from home may be included in the business/job expense deduction.

Local transportation expenses. If your courses qualify for a deduction under 33.15, you may deduct transportation costs of going from your job directly to school. Transportation costs include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. According to the IRS, the return trip from school to home is also deductible if you are regularly employed and going to school on a temporary basis. According to the IRS, you are going to school on a temporary basis if your courses are realistically expected to last for one year or less and actually do last no more than one year. This is the same one-year test for determining whether you can deduct the cost of commuting to a “temporary” work location (20.2) or living costs while away from home on a “temporary” assignment (20.9). The IRS position is illustrated in the following Examples.

Using your car. If you use your own car for transportation to school, you may deduct your actual expenses or use the standard business mileage rate to figure the deductible amount. The standard mileage rate for 2017 is 53.5 cents per mile. Whether you deduct the standard mileage rate or actual expenses, you may also deduct parking fees and tolls.

Travel and living expenses away from home. “Away from home” has a special tax meaning (20.7). You are not away from home unless you are away overnight. If you are away from home to attend a qualifying course, you may deduct the cost of travel to and from the site of the course, plus lodging and 50% of meals while you are there.

Expenses of sightseeing, social visiting, and entertaining while taking courses are not deductible. If personal reasons are your main purpose in going to the vicinity of the school, such as to take a vacation, you may deduct only the cost of the courses and your living expenses while attending school. You may not deduct the rest of your travel costs.

To determine the purpose of your trip, an IRS agent will pay close attention to the amount of time devoted to personal activities relative to the time devoted to the courses.

Is travel itself a form of education? A teacher generally may not deduct the cost of an “educational” trip to another state or country as a job expense. Although a trip may have educational value in that the teacher learns about people, culture, or places related to the courses that he or she teaches, the IRS position is that a specific statute, Code Section 274(m)(2), bars a deduction for travel as a form of education. There may be exceptions where specific research can only be accomplished at a particular location, but a trip for “general” educational purposes does not qualify according to the IRS.

The Tax Court took a different view of the statute in a decision that opens the door to a deduction for teachers who travel overseas to take highly organized courses with regular lectures, a structured syllabus, tours to historically and culturally relevant sites, and extensive reading assignments. The Court allowed a California high-school English teacher and department chair to deduct $5,334 for her airfare, lodging, meals, and tuition for an 18-day trip to Greece in 1995. She was also allowed to deduct $7,705 for a two-week trip to Southeast Asia in 1996. In Greece, she took a course on Greek myths and legends and on the Asian trip, a course on Buddhist and Hindu traditions. Her school required neither course. For the Tax Court, the key to the deduction was the organized nature of the courses, which were sponsored by the Berkeley extension program, taught by university professors, and qualified for undergraduate credit, although the teacher was not taking the courses for credit. The regular lectures, tours, and readings were focused educational activities, not the type of mere educational travel that Congress intended to make nondeductible. After holding that a deduction was not barred by Section 274(m)(2), the Court still had to find that the courses had the primary purpose of maintaining or improving the teacher’s skills, but it had little difficulty in doing so. The courses improved her teaching skills and helped her to develop curriculum. The courses on Asian traditions also helped her relate better to the predominantly Asian student population in her school. She spent most of her time attending courses and related programs and had minimal free time.