Benefit

If your employer pays or reimburses you for the cost of higher education, you are not taxed on payments up to $5,250 annually. If the courses are job‐related, there is no dollar limit to the exclusion from income for this employer‐paid fringe benefit. This fringe benefit is not subject to Social Security and Medicare (FICA) taxes.

If you work for an educational institution and receive tuition reductions, such benefit may be excludable (see Conditions, next).

If your employer pays your student loan debt directly or reimburses you for it, you aren't taxed on up to $5,250 per year.

Conditions

Different conditions apply to employer‐paid education under an education assistance plan and tuition reduction if you work for a college or university.

Planning Tip

If you are seeking a job and plan to pursue college or graduate courses while working or have student loan debt to repay, look for a company with an educational assistance plan. The value of this benefit can be substantial to you if you use it fully and should be factored into the salary being offered for the position.

Pitfalls

Generally, you must attain a certain course grade for your employer to pay for the education. Make sure you understand what you must do to obtain reimbursement or have your course fully paid by your employer.

You cannot use any benefit received under an employer's plan as the basis for claiming a second tax benefit. For example, if your employer pays $2,000 for a course you take, you cannot claim an education credit for this amount.

Or if your employer pays for a student loan, you cannot deduct interest paid on that loan (explained later in this chapter).

Where to Claim the Exclusion

If employer‐provided education assistance is excludable from income, it is not reported on your return. You may find the amount of employer‐paid education benefits reported on your Form W‐2 for information purposes only; it is not added to your compensation.

Benefit

If you are enrolled in a degree program at a school and receive a scholarship, fellowship, or grant, you can exclude the portion of the grant for tuition, course‐related fees, books, supplies, and equipment. There is no dollar limit on this exclusion.

If you receive a Fulbright award, it is fully taxable (unless you can claim the foreign earned income exclusion explained in Chapter 13).

Condition

For tax‐free treatment to apply, the grant must be for study in a degree program. A degree program includes:

• Primary and secondary school
• College or university degree programs
• Full‐time or part‐time scholarships for study at a school that provides an education program acceptable for full‐time credit toward a degree or offers a program of training to prepare students for employment in a recognized occupation

Planning Tips

For education planning purposes, obtaining a scholarship, fellowship, or grant is the best way to finance learning. The award doesn't cost you anything and doesn't have to be repaid. Explore carefully any grants to which you, a spouse, or a dependent may be entitled.

Stipends and non‐tuition fellowship payments for graduate and postdoctoral students, which are not treated as taxable compensation, can be treated as such for purposes of making IRA contributions.

Pitfalls

Scholarship amounts for room, board, and incidental expenses are taxable.

If you are a graduate student who receives payment (a stipend) for teaching, doing research, or providing other services as a condition of the grant, you are taxed on the payment. Such amount is reported on Form W‐2 and is subject to income tax withholding.

Generally, no exclusion can be claimed if receipt of a federal grant is conditioned on your performing services in the future. For example, if you receive a scholarship that requires you to teach for at least 3 years as a condition of the grant, you cannot exclude this grant from your income.

Where to Claim the Exclusion

If the grant is excludable from income, you do not have to report it on your return.

If the grant is partially taxable (for example, you are not a degree candidate and so are taxed on the portion of the grant for housing), you report this as other income on Schedule 1 of Form 1040 or 1040‐SR. If you are a graduate student receiving a stipend for services, such amounts are reported as wages directly on Form 1040 or 1040‐SR.

Benefit

If you meet certain conditions and do not claim the lifetime learning credit discussed later, you can claim the American opportunity credit for higher education costs of up to $2,500 per student (100% of the first $2,000 of costs, plus 25% of the next $2,000 of costs). Thus, for example, if you have twins who are freshmen in college, you can qualify for a credit of up to $5,000.

In 2022, 40% of the credit is refundable in most situations (it can be repaid to you even though it is more than your tax liability).

Conditions

To claim the American opportunity credit, you must meet all 5 of these conditions:

1. Payments relate to the first 4 years of higher education.
2. Payments are made on behalf of an eligible student.
3. Payments are made to an eligible institution.
4. Payments cover qualified higher education costs.
5. Your modified adjusted gross income is not above a set limit.

Planning Tips

You can claim the credit even though eligible expenses are paid with the proceeds of a loan. You can also claim the credit if eligible expenses are paid by someone other than you, your spouse, or your dependent, such as the student's grandparent. The payment is treated as having been made by the student, and as your dependent (even though no dependency exemption is deductible in 2022), this entitles you to claim the credit if you are otherwise eligible to do so.

As the parent, if you pay the expenses but your MAGI is too high to permit you to claim the credit, you can waive your right to do so. This will allow your child to claim the credit on his or her own return (assuming the child has tax liability and can benefit from the credit). Your child can claim the credit even though you pay the expenses.

Pitfalls

The credit must be coordinated with other education tax benefits you may be qualified to use. You can claim the credit in the same year in which you receive distributions from a Coverdell education savings account (ESA) or 529 plan. However, the expenses on which you base the credit cannot be the same expenses used to figure the tax‐free portion of the distributions.

If you claim a credit and in a later year (after you have filed the return and claimed the credit) receive a refund of an amount that was used to figure the credit, you must recapture some or all of the credit. This means you must repay some or all of the credit. You treat the recaptured amount as additional tax liability for the year of recapture. Do not amend the return on which the credit was claimed.

You cannot claim the credit for expenses that are paid by tax‐free scholarships, fellowships, grants, veterans' educational assistance, or employer‐provided educational assistance.

Where to Claim the Credit

The American opportunity credit is figured on Form 8863, Education Credits. The refundable portion of the credit is then entered on line 29 of Form 1040 or 1040‐SR. The nonrefundable portion of the credit is entered on Schedule 3 of Form 1040 or 1040‐SR.

Benefit

If certain conditions are met, you can claim a credit of up to $2,000 on your return for the payment of qualified higher education costs for you, your spouse, or your dependent. In contrast to the American opportunity credit, which is a per student credit, the lifetime learning credit is per taxpayer. So if you have 3 children in college, your lifetime learning credit for the year is limited to $2,000 (assuming you qualify to claim it).

Unlike the American opportunity credit, which applies only for the first 4 years of higher education, the lifetime learning credit can be claimed for any higher education, including graduate‐level courses.

Conditions

Most of the conditions for the lifetime learning credit are the same as those for the American opportunity credit detailed earlier, unless otherwise noted here. Thus, the same planning tips and pitfalls also apply.

The ability to claim the lifetime learning credit depends on your modified adjusted gross income (MAGI). The limits for this credit are the same as the limit applicable to the American opportunity credit. If your MAGI is below a phaseout range, then the full credit can be claimed; a partial credit is allowed for those with MAGI within the phaseout range. No credit can be claimed if your MAGI exceeds the range. Table 3.1 earlier in this chapter shows the phaseout ranges.

Planning Tip

Since the lifetime learning credit cannot be claimed for a student for whom an American opportunity credit is claimed, decide which credit produces the greater tax savings. Usually, this is the American opportunity credit because there is a higher credit limit ($2,500 versus a $2,000 limit for the lifetime learning credit). However, once a student is beyond 4 years of college, then there is no choice; only the lifetime learning credit can be claimed.

Pitfalls

The same pitfalls applicable to the American opportunity credit apply to the lifetime learning credit. Thus, you must receive Form 1098‐T before claiming the credit.

Where to Claim the Credit

The lifetime learning credit is figured on Form 8863, Education Credits. The credit is then entered on Schedule 3 of Form 1040 or 1040‐SR.

Benefit

If you pay for education related to your current line of work, you may be able to deduct your expenses.

If you qualify for the deduction by meeting all of the conditions, you claim the deduction as a business expense if you are self‐employed. There is no dollar limit on this deduction.

Conditions

To deduct education expenses, you must meet all 5 of these conditions:

1. You are self‐employed.
2. You already meet the minimum job requirements for your work (as set by your employer or state law).
3. The courses maintain or improve your skills or you are required by your employer or by law to take the course to keep your current salary or position.
4. The courses do not lead to a new line of work.
5. You pay for eligible education expenses.

Planning Tip

Monitor developments in Congress to see whether the itemized deduction for employee education costs is restored.

Pitfall

When taking continuing education courses or seminars for your work as a self‐employed individual, be sure to retain proof of attendance and the costs involved.

Where to Claim the Deduction

As a self‐employed person, you deduct the expenses directly as a business expense on Schedule C of Form 1040 or 1040‐SR.

Benefit

If you pay interest on student loans, you may be able to deduct up to $2,500 of interest as an adjustment to gross income (if your actual interest payment is more than $2,500, your deduction is limited to that amount). There is no limit on the number of years you can claim this deduction; as long as you continue to pay off the loan, you can deduct your interest if eligible to do so.

If the loan is canceled, you may qualify for tax‐free treatment on the debt forgiveness (explained later in this chapter).

If your employer pays your student loan (interest and principal) up to $5,250 under an educational assistance plan, you are not taxed on this benefit (explained earlier in this chapter).

Conditions

There are a couple of conditions for claiming a deduction for student loan interest as an adjustment to gross income. You must meet both:

1. The loan must be a qualified loan.
2. Your modified adjusted gross income cannot exceed a set limit (there is a partial deduction allowed if MAGI falls within a phaseout range).

Planning Tips

If a student has taken the loan and parent, grandparent, or anyone else pays the debt, the student is treated as having made the payment and can take the student loan interest deduction (as long as the student is not a dependent and has MAGI below the threshold amount). In some instances, the cancellation of student loans can be tax free (usually the cancellation of a debt is taxable). This is explained later in this chapter.

If you employer reimburses you for student loan debt under an educational assistance plan (explained earlier in this chapter), this is a tax‐free fringe benefit. But you may not deduct the interest that is part of the repayment.

Repayment of student loans under federal loan programs was paused at least through December 31, 2022. A 0% interest rate was applied during this suspension.

Pitfalls

You cannot claim a double benefit for the same interest deduction. For example, if you take out a home equity loan to pay your child's college expenses, you cannot claim a student interest deduction if you deduct the mortgage interest as an itemized deduction. It is, of course, more favorable to treat the interest as student loan interest to the extent possible.

If your employer helps to pay your student loan debt and this does not fall under an educational assistance plan, this is taxable compensation to you.

If you have your federal student loan repayments paused, you may not deduct the interest that hasn't yet been paid.

Where to Claim the Deduction

The deduction is claimed on Schedule 1 of Form 1040 or 1040‐SR. No special form or schedule is required.

Benefit

If you redeem U.S. savings bonds to pay for qualified higher education costs or to contribute to a 529 plan or Coverdell education savings account, you are not taxed on the interest as long as your modified adjusted gross income (MAGI) is below a set amount. There is no dollar limit to this benefit; if you qualify you can exclude from income all of the interest received on the redemption of the bonds.

Conditions

Assuming you have not been reporting interest on the savings bonds annually but deferring it, you can claim the exclusion if you meet all 4 of these conditions:

1. Eligible bonds.
2. Eligible taxpayer.
3. MAGI limit.
4. Qualified use of redemption proceeds.

Planning Tips

If you are holding EE or I savings bonds and want to know how much they are worth today, you can check their redemption values at www.savingsbonds.gov.

The U.S. Treasury has changed the way in which interest on Series EE bonds is computed. Rather than adjusting the interest semiannually, these bonds now pay a fixed rate until redemption or maturity. As a result, Series I bonds may be a better option because their interest rate still adjusts semiannually for inflation.

You can purchase I bonds via a direct deposit of your tax refund into a TreasuryDirect account used for this purpose. Just provide the IRS with the account information, and your refund will be transferred directly to your account. Bonds can be purchased only in multiples of $50; there is a $5,000 limit on purchases using a tax refund. This opportunity only applies to a refund claimed on an original return; you can't buy bonds with a refund from an amended return.

Interest on savings bonds is never subject to state income tax (such interest is always exempt).

Pitfalls

You cannot use this exclusion to pay college expenses for your grandchild unless the grandchild is your dependent in the year in which the bonds are redeemed.

You cannot claim the exclusion if you are married and file a separate return from your spouse.

Where to Claim the Exclusion

If you claim the exclusion, you must complete Form 8815, Exclusion of Interest from Series EE and I Bonds Issued after 1989, and attach it to your return.

Benefit

You may be able to contribute up to $2,000 annually to a savings account for each beneficiary. The account is called a Coverdell education savings account (ESA) (it used to be called an education IRA). The account can have multiple contributors, but no more than $2,000 can be placed in the account for any one year.

Earnings on contributions accumulate tax deferred. If withdrawals from the account are used to pay qualified education expenses, the earnings become tax free.

Conditions

There are a couple of conditions for funding a Coverdell education savings account as well as for taking tax‐free distributions.

1. For purposes of contributions, they can be made only on behalf of an eligible beneficiary (defined next) by a contributor whose modified adjusted gross income does not exceed set limits. Contributions must be made in cash, not property.
2. For purposes of tax‐free distributions, funds must be used only for eligible expenses.

Planning Tips

You can open a Coverdell education savings account at any bank or other financial institution that has received IRS approval to offer Coverdell ESAs. You can then select the investments you prefer, from certificates of deposit to stocks and mutual funds (to the extent available from the institution you select).

Just like IRA contributions, contributions to Coverdell ESAs can be made up to the due date of the return for the year to which they relate. However, obtaining a filing extension does not extend the deadline for making contributions.

You can turn taxable custodial accounts into tax‐free Coverdell education savings accounts by using the funds in the custodial account for contributions. However, only cash contributions are permitted to a Coverdell education savings account, so investments in the custodial accounts must first be sold so that the proceeds can be contributed.

You can change accounts from one financial institution to another by means of a tax‐free rollover. You may not be satisfied with the service or investment options you have at one financial institution and can switch by means of a rollover to another financial institution.

You can move money in a Coverdell ESA between certain beneficiaries on a tax‐free basis. The amount withdrawn from a Coverdell ESA can be rolled over to the same or a new designated beneficiary who is a member of the original beneficiary's family (listed in the next section). The rollover must be completed within 60 days. There are no tax consequences to naming a new designated beneficiary (as long as such beneficiary is permissible).

You can fund contributions to a Coverdell ESA by means of a direct deposit of a tax refund. For example, say you are owed a refund on your 2022 return. Use the refund to contribute to a Coverdell ESA (assuming you meet eligibility requirements) by filing the return early enough for the IRS to process it and electronically transfer the refund to the Coverdell ESA by April 18, 2023, for a 2022 contribution (you can also use the 2022 tax refund to make a 2023 contribution if your income allows it and the beneficiary will not have aged out of eligibility).

Anyone who receives a military death gratuity or payment under the Servicemen's Group Life Insurance (SGLI) program can contribute this amount to a Coverdell ESA; the usual contribution limit and MAGI limit do not apply in this case.

Pitfalls

While distributions can be used to pay for primary and secondary school expenses, they cannot be used for home schooling.

If you contribute more than $2,000 on behalf of a beneficiary within one year, the excess amount is subject to a 6% excise tax (this is a penalty). The penalty is paid by the beneficiary (not the contributor). But the penalty can be avoided by withdrawing the excess contribution, plus any earnings on the contribution, before the beginning of the 6th month following the year of the contribution (e.g., by May 31, 2023, for 2022 contributions).

The 6% excise tax continues to apply each year in which excess contributions (and earnings on excess contributions) remain in the Coverdell ESA.

Taxable distributions, which are withdrawals made to pay for noneligible expenses, are not only taxed as ordinary income but are subject to a 10% additional tax. However, the 10% penalty does not apply to distributions that meet any of these conditions:

• Distributions are made to a beneficiary or to the estate of a designated beneficiary on or after the death of a designated beneficiary.
• Distributions are made because the designated beneficiary is disabled.
• Distributions are made because the designated beneficiary received a tax‐free grant or educational assistance allowance that equals or exceeds the distribution.
• Distributions are taxable only because the qualified expenses are reduced by expenses taken into account in figuring an education credit.

Withdrawals from a Coverdell ESA can be made in the same year in which an education credit is claimed. However, the same expenses cannot be used for both benefits.

Withdrawals from both a Coverdell ESA and a 529 plan are permitted in the same year. But if total withdrawals exceed qualified higher education expenses, the expenses must be allocated between the Coverdell ESA and 529 plan to figure the taxable portion of the withdrawals. Generally, the allocation is based on the ratio of the Coverdell ESA withdrawals to the total withdrawals.

Funds remaining in the account become taxable to the beneficiary within 30 days of attaining age 30 (or within 30 days of death if the beneficiary dies before age 30). The 30‐year age limit does not apply to a special needs beneficiary (defined earlier).

However, tax on the earnings in the account can be avoided if the balance in the account is transferred to another eligible beneficiary within 60 days of attaining age 30 (or death if earlier). An eligible beneficiary for this purpose includes members of the beneficiary's family:

• Spouse
• Child or stepchild
• Grandchild
• Brother, sister, half‐brother, or half‐sister
• Niece or nephew
• Parent or stepparent
• Grandparent
• In‐laws and the spouses of any of the listed relatives

Where to Claim the Exclusion

Contributions to a Coverdell education savings account are not reported on the return of the contributor or the beneficiary. Similarly, withdrawals that are not taxable are not reported on any return.

If contributions are subject to the 6% excise tax, the beneficiary figures the excise tax in Part V of Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax‐Favored Accounts, and reports it on Schedule 2 of Form 1040 or 1040‐SR.

If withdrawals from a Coverdell ESA are taxable, they are reported on the beneficiary's return as “other income” on Schedule 1 of Form 1040 or 1040‐SR. If they are also subject to the 10% additional tax, this amount is figured in Part II of Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax‐Favored Accounts.

Benefit

There are 2 types of qualified tuition programs (QTPs): a prepayment plan under which payments are guaranteed to cover (or partially cover) tuition, regardless of tuition increases, and a savings‐type plan in which the funds you will have available to pay for education depend on the investment performance of your account. From a tax perspective, however, both types of plans are governed by the same tax rules under Section 529 of the Internal Revenue Code (hence the name “529 plans”), and both types of plans have the same benefits and conditions.

While contributions to qualified tuition programs do not generate a federal income tax deduction or credit, the long‐term benefits are considerable:

• Earnings within the plan are tax deferred.
• If funds in the plan are used to pay qualified education costs, they are tax free (the earnings on the contributions are never taxed in this case).
• Unused amounts can be transferred tax free to another beneficiary if the original beneficiary does not go to college or otherwise need the funds.

There may be state income tax breaks for the contributions to qualified tuition programs as well. For example, if you are a resident in New York, you can deduct contributions to the New York 529 College Savings Program up to $5,000 per taxpayer per year on your New York state income tax return. Of the states with income taxes, only the following do not offer a deduction or credit for contributions: California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina.

Conditions

Most conditions and requirements are fixed by each state's own 529 plan. However, for tax purposes, there are a couple of key conditions to obtaining all of the benefits under a qualified tuition program:

1. Contributions can be made only to qualified tuition programs. There are no federal tax limits on annual or total contributions to a 529 plan. These limits are fixed by each state's unique program (e.g., Missouri's and Virginia's plans have a $550,000 cap per beneficiary in 2022 and no contributions can be made once the plan reaches this cap).
2. Distributions can be withdrawn only for qualified expenses.

Planning Tips

The terms and conditions of qualified tuition programs vary considerably from state to state. You can learn about the investment options, fees, and other rules on state 529 plans at www.savingforcollege.com. For details on the private 529 plan created by a consortium of private colleges and universities (nearly 300 schools participate), go to www.privatecollege529.com.

If you plan for your child to attend your alma mater on a legacy basis, ask the school whether it offers or plans to offer a tuition prepayment plan.

For purposes of the federal financial aid formula, funds in 529 plans are not considered to be the assets of the student.

Qualified tuition programs can be used effectively for estate planning purposes. For example, a wealthy grandparent can reduce the size of his or her estate while funding an education savings plan for a grandchild with little or no gift tax cost. If you plan to make sizable contributions in one year, you can elect to treat the contributions as made equally over 5 years. This will entitle you to apply the annual gift tax exclusion, which is $16,000 in 2022 ($32,000 for married persons making joint gifts), 5 times to avoid or reduce gift tax.

If the contribution exceeds this limit, the excess amount is treated as a gift in the year the contribution is made.

Amounts in a 529 plan can be transferred to a new beneficiary or rolled over tax free within 60 days of a distribution. There is a limit of one transfer or rollover per year. However, a beneficiary can be changed without making a transfer or rollover; the new name is substituted for the old one on the same account. This option applies only if the new beneficiary is a member of the old beneficiary's family, which includes:

• Child or grandchild
• Stepson or stepdaughter
• Sibling or stepsibling
• Parent or grandparent
• Stepparent
• Aunt or uncle
• Niece or nephew
• Son-in-law, daughter‐in-law, father‐in-law, mother‐in-law, brother‐in-law, or sister‐in-law
• The spouse of any relative on this list
• First cousin

In the case of a savings‐type 529 plan, if the account declines in value from the amount contributed, the loss may be recognized when all of the funds in the account are distributed. The IRS says that the loss is treated as a miscellaneous itemized deduction on Schedule A of Form 1040 or 1040‐SR, which is deductible to the extent total miscellaneous itemized deductions exceed 2% of adjusted gross income, but cannot be deducted in 2022 due to the suspension of this deduction. Some tax experts believe that the loss is simply claimed as an ordinary loss. This theory has yet to be tested in court.

You can change investment selections once a year, and whenever there is a change in beneficiary.

For 2018 through 2025, amounts in a 529 plan can be rolled over tax free to an ABLE account if the ABLE account beneficiary or this designated beneficiary's family member is the beneficiary of the 529 plan. Any amount rolled over counts toward the overall limit on annual contributions to an ABLE account. Because such rollover is counted, it probably isn't a good idea to do it and instead fund the ABLE account; this maximizes the overall savings for the beneficiary.

Funds within 529 plans offer asset protection in case of bankruptcy. Contributions to the plan made at least one year but less than 2 years before filing for bankruptcy are protected up to $5,000. Contributions made 2 years or more before filing for bankruptcy are fully protected (no dollar limit applies). All contributions made within one year of filing for bankruptcy are at risk.

Pitfalls

If funds are withdrawn from a 529 plan and not used for qualified education expenses, earnings on the distribution are taxable. For example, if part of a distribution is used for spending money or travel expenses, the earnings on this portion of the distribution are taxable.

In addition, the portion of the distribution representing earnings on contributions is subject to a 10% penalty. However, both the tax and the penalty on a refund made by the institution (e.g., because the student receives a scholarship) can be avoided by redepositing the funds in the 529 plan within 60 days of receipt.

Withdrawals from a 529 plan can be made in the same year in which an education credit is claimed, but the same expenses cannot be used for both benefits.

If withdrawals are made from a 529 plan and Coverdell ESA in the same year and the total withdrawal exceeds qualified education expenses, a portion of the withdrawal is taxable. How to figure the taxable portion was explained earlier in the Coverdell Education Savings Accounts section, under “Pitfalls.”

The permissible distribution up to $10,000 annually for primary and secondary school tuition does not apply to home schooling expenses. And be sure to check on the state income tax treatment of distributions for primary and secondary school tuition (some states are taxing them).

Where to Claim the Exclusion

Contributions to qualified tuition programs are not reported on the return of the contributor or the return of the beneficiary.

Distributions from qualified tuition programs are not reported if they are tax free. To figure the tax‐free portion of distributions, you can use a worksheet for this purpose in IRS Publication 970. For any year in which distributions are made, the 529 plan must send you (and the IRS) an information return, Form 1099‐Q, Qualified Tuition Program. For distributions in 2022, the form must be issued no later than January 31, 2023.

Benefit

Work‐related seminars may be deducted if the conditions for work‐related education discussed earlier in this chapter are met.

No deduction can be claimed for seminars on self‐improvement that are not work‐related. No deduction can be claimed for investment seminars.

Where on the Return to Claim the Deduction

See work‐related education for self‐employed individuals discussed earlier in this chapter.

Benefit

They say travel is broadening (a century ago, wealthy young men and women used to “take the grand tour” as a coming‐of‐age lesson). From a tax perspective, however, a deduction for educational travel is extremely limited. As a general rule, no deduction can be claimed for educational travel. However, this ban does not apply to overseas courses and lectures, the cost of which may qualify for a work‐related education deduction for a self‐employed individual.

Conditions

To be deductible as work‐related education, travel must meet all of the conditions discussed earlier in this chapter.

Planning Tip

Overseas courses need not be taken for credit to qualify for a deduction. For example, an English teacher who took a course on Greek myths in Greece taught by university professors was allowed a deduction for her travel expenses and course registration fees even though she did not take the courses for credit (this case arose when employees were able to deduct education costs as miscellaneous itemized deductions.).

Pitfall

No deduction can be claimed for travel that is merely beneficial. For example, an architect who travels to Europe to view cathedrals there cannot deduct the cost of the trip as an education expense.

Where to Claim the Deduction

See work‐related education for self‐employed individuals discussed earlier in this chapter.

Benefit

Normally, the cancellation of a loan results in taxable income to the borrower. But under certain conditions, the cancellation of a student loan can be tax free. There is no dollar limit to this benefit.

Conditions

There are 3 different ways in which the cancellation of your student loan debt is not treated as income.

1. You can exclude the debt forgiveness on your student loan from income if you are required to work for a set period of time in a certain profession (e.g., nursing, medicine, law, or education) for any of a broad class of employers.

   The loan must have been made by a qualified lender, which includes:

   • The government (federal, state, or local government or an agency of the government)
   • A tax‐exempt public benefit corporation
   • An educational institution if the loan is made under an agreement with the government or a tax‐exempt public benefit corporation or under a program designed to encourage students to serve in occupations or areas with unmet needs
2. For discharges in 2018 through 2025, there is no income from the cancellation of this debt on account of the death or total and permanent disability of the student. Loans eligible for this tax‐free discharge are those made by a qualified lender listed above as well as a private education loan (Section 140(7) of the Consumer Protection Act).
3. The exclusion also applies to the discharge of student loans after December 31, 2020, and before January 1, 2026, for most student loans for higher education, including government loans, loans by eligible education institutions, and private education loans subject to the Truth in Lending Act. The IRS advised lenders not to issue Form 1099‐C, Cancellation of Debt.

Planning Tip

Due to COVID‐19, the U.S. Department of Education provided repayment deferrals of certain federal student loans at least through December 31, 2022. The interest rate during this suspension period is 0%. If borrowers choose to make repayments during this period, 100% of the payments are applied toward principal. This suspension period does not apply to loans from private lenders or to certain federal student loans (e.g., Perkins Loans) owned by private lenders.

Pitfall

Don't assume that filing for bankruptcy will erase your student loan debt. A discharge for student loan debt in bankruptcy may be allowed for undue hardship. And an appellate court also allowed a discharge under a new interpretation of the bankruptcy law.

Where to Claim the Benefit

If the loan forgiveness is tax free, you do not report anything on your return. If cancellation of your student loan is not tax free, you must include the debt forgiveness in income on your return. Report it as other income on Schedule 1 of Form 1040 or 1040‐SR. Generally, debt forgiveness that is not tax free is reported to you (and to the IRS) on Form 1099‐C, Cancellation of Debt.