In orde to claim education credit or deduction, one of the most important condition is that the exepnse on education should be within the Qualified Education Expense defined under Internal Revenue Code. So what does the term Qualified Educational Expense mean ? Generally , a qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student.A close examination reveal that there are many conditions that needs to be satisfied before one can claim an expense for the purpose of educational credit. So here are five frequently asked questions which will cover almost all the necessary issues related to qualified educational expense.
1. What are the Qualified Educational Expenses ?
Tuition fees and other related expense (even include student activity fees) for enrollment or attendance at an eligible educational institution are considered Qualfied Educational Expense that you pay for an academic period that starts during the tax year or the first three months of the next tax year.
2. Who Must Pay Qualified Education Expense ?
There are ceratin restriction about the person who must pay educational expense if he /she desire to claim education credit . So, it is rule that the payment must be done by :
- You or your spouse if you file a joint return,
- A student you claim as a dependent on your return, or
- A third party including relatives or friends.
3. Can I borrow fund for paying qualified educational expense ?
Yes, you can borrow money foying educational expense. You can also pay claim educational expense by cash, check, credit or debit card .It must be noted that if you borrow the money for paying qualified educational expense , the tax credit is given in year of payment and not year of borrowing loan.
4. What Do Not Qualify Under Qualified Educational Expense
Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses:
- Room and board
- Medical expenses (including student health fees)
- Similar personal, living or family expenses
- Sports, games, hobbies or non-credit course
- Expenses for sports, games, hobbies or non-credit courses do not qualify for the education credits or tuition and fees deduction, except when the course or activity is part of the student’s degree program.
5.If You Are Claiming Education Credit For AOTC or LLC
For American Opportunity Tax Credit expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense.
As far as LLC or Lifetime Learning Credit is concerned , expenses qualify if the course helps the student acquire or improve job skills.
7. Can Expenses Cannot Be Paid with Tax-Free Funds ?
No. the education credt can not be claimed if the expense was incurred out of tax free funds. In fact as per law , one has to compute the expense by exclusing any payment out of scholarships , fellowships and other tax-free education grants.
8. What happens if the Student Withdraws from Classes?
Simple rule is that if the students withdraws from class , the education credit has to be adjusted to the extent amounts not refunded by school or institution if the student withdraws.
You can get further guidance from IRS guide on education credit