How To Organize Your College Expenses For Tax Time

My first thought in writing this is, why am I having to write about taxes? I’m a college planner! But, the IRS has worked its way into just about every part of our lives, and it’s supposed to be a good thing. The fact that I have to write this article means that the powers that be have decided to encourage participation in the college marketplace by offering us tax advantages. Thanks, IRS.


Now, on the surface of it, taking advantage of this kind offer should be pretty simple. You get tax documents from your college or university, you give it to your CPA or use the information while completing the questionnaire from your favorite tax software, and it really doesn’t have to be difficult, but there are a few things you can do throughout the year to make sure you’re not scrambling come April 15th.


If nothing else - do this


Keep both a physical folder and virtual folder for all of your college documents that relate to money. You’ll get some things in the mail and others via email or a web portal, hence the need for 2 storage locations.


These files should contain documentation of:


  • College tuition, fee, and room and board payments

  • Receipts from textbook purchases

  • Scholarship awards

  • Record of purchases if required in scholarship specifications

  • Record of withdrawals from 529, IRA, or 401k to pay for college

  • W-2’s related to scholarships

  • 1098-T from the institution

  • 1099-Q related to 529 or Coverdell withdrawals


With all of this information in hand, you will not be at a loss when it comes time to file your taxes.


What Else You Need To Know


You will need to have qualified expenses to support any tax advantaged methods of paying for college, and there isn’t one single definition of a qualifying expense. For example, room and board is a qualifying expense for a 529 withdrawal but not for a tax free scholarship. Therefore, you should reference the qualifying expenses for each source that you will need. You must make sure you have enough supporting expenses to back up your claim to all tax advantaged sources. You will likely not be asked to provide this information to the IRS, but you’ll have it ready if you need it.


Qualifying Expenses


One commonality between what is considered a qualifying expense is that you are attending a qualified institution. If you have any doubts about whether the school you are attending is qualified, you should check this document.


Scholarships, Fellowships, Grants, AOTC


Money from these sources will either be taxable or tax free depending on what it is used for.


Tax free when used for

  • Tuition

  • Fees

  • Books

  • Supplies and fees required by the school or class


Taxable when used for

  • Room and Board

  • Rent and other living expenses

  • Travel

  • Supplies not a requirement of the school or class

  • Other



You should expect to receive a W2 from the school for scholarship money that they deem to be taxable. You will need to include that amount on your tax return.


LLC


The IRS provides a guide here on this credit, and the qualified expenses are essentially the same as for the AOTC except that, in the case of the LLC, some expenses must be required to be paid to the school in order to qualify. The IRS provides several examples in this document.


529


The definition of qualified expenses paid from a 529 is somewhat more broad and include:

  • Tuition, fees, expenses related to attending a qualifying institution

  • Room and board paid to the school or the equivalent amount spent to rent a place off campus

  • The purchase of a computer and other hardware and software needed for the educational program (not for hobbies or gaming)

  • Internet service for the student

  • Up to $10,000 can be used towards the payment of student loans


Penalty Free IRA Withdrawal


For a withdrawal from an IRA for college expenses before age 59 1/2, you must pay an early withdrawal penalty of 10% unless an exception applies. One except is for the payment of qualified education expenses including the following:

  • Tuition, fees, books and supplies required by the institution

  • Room and board or an equivalent amount paid to rent a place off-campus

  • Accommodation for special need students


Education Savings Bond


You can avoid paying interest of Series EE and Series I Bonds when the proceeds are used for tuition, fees required by the institution. They may also be used to contribute to a 529 plan. The following expenses do not qualify for this special tax treatment:

  • Room and board

  • Costs associated with course related to sports, hobbies or games unless they are a requirement of the degree or certificate program


Employer Provided Educational Assistance


An employer can provide education assistance of up to $5,250 per year tax free. In order to maintain the tax free status, the funds must be used for:

  • Tuition, fees, books, supplies and equipment either for any type of training to improve your skills


The funds can not be used for:

  • Meals, lodging or transportation

  • Tools or supplies other than textbooks

  • Courses related to sports, games or hobbies unless they are either related to the business or a requirement of a degree program