Qualified expenses (QHEE’s) are expenses that are eligible for some form of tax benefit such as the AOTC or a tax- and penalty-free distribution from a 529 account. Sounds simple, right? Let the fine print begin! Not all “qualified expenses” qualify for all purposes. And of course the most important rule of claiming education tax benefits: You can’t double-dip. That means that if you use 529 plan funds to pay an expense, you cannot also claim a tax credit for that expense.
Here is a run-down of what expenses are qualified for which benefits:
529 Plans: These have the broadest range of qualified expenses. For students in college, 529 money can be used for the following:
- Tuition and fees
- Books and supplies
- Computers and related equipment (i.e., software and Internet access)
- Room and board (actual expenses if you live on campus; an allowance set by the school for students living off-campus)
- Special needs equipment
In addition 529 plan funds can be used for up to $10,000 of K-12 tuition annually, but not for any of the other above items (room and board, computer, books, etc.).
Education tax credits (AOTC or LLC): The qualified expense list for education tax credits is much shorter:
- “Other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution.”
In addition, the AOTC includes required books, supplies and equipment, regardless of where they are purchased as qualified expenses.
For sports, games, hobbies or non-credit courses, expenses are qualified for AOTC purposes only if they are part of the student’s degree program. For LLC purposes, these expenses can qualify if the course is taken to acquire or improve the student’s job skills.
What’s missing from both of those lists? Student health insurance. Even if it’s billed as part of your tuition and fees, it’s not a qualified expense.
The big difference for most students is room and board. 529s can be used to pay for it; tax credits cannot be taken for it. You could say that the easy way to remember this is, your 1098-t will only list tuition; however, it also won’t include books and supplies which are eligible for tax credits. Just remember that a student with a full tuition scholarship is only going to get a tax credit for their books and supplies, not housing expenses.
And just a reminder, here is a previous post with some more expenses for which families can use their 529.