Education Tax Benefits FAQ

Content provided for general information. Talk to your advisor to confirm the details for your specific situation before taking action.

Here are some of the most frequently asked credits about taxes and education including deductions, credits, savings plans, tax filing, and more.

529 Plans

Is a 529 plan tax free?

You generally don’t pay taxes on any investment gains inside of a 529 plan. Withdrawals are also generally tax-free as long as they’re made for a qualifying education purpose.

Can you deduct 529 plan contributions?

There is no federal tax deduction for 529 plans. Some states do allow a deduction.

Minnesota 529 Plan Deduction

Minnesota has two options for a tax break for contributing to a 529 plan. You can choose the one that results in the biggest tax savings which will vary based on the rest of your tax situation.

  • Take a tax deduction equal to your contributions with a maximum of $1,500 ($3,000 for joint filers)
  • Take a tax credit equal to 50% of your contributions with a maximum of $500. If your federal adjusted gross income is higher than $75,000, your credit will be reduced.

If you take a non-qualified withdrawal from the 529 plan, you will usually need to pay back the tax benefit you received on the amount you’re withdrawing.

Is a Roth IRA better than a 529 plan?

Some parents set up Roth IRAs for their children’s education for three reasons:

  • Roth IRA contributions can normally be withdrawn without taxes or penalties.
  • Roth IRA earnings can be withdrawn without penalty for qualified educational expenses. Income taxes apply to earnings but don’t start until you withdraw all contributions.
  • Unused funds can be kept in the account as a start to your child’s retirement savings.

There are potential downsides to using a Roth IRA.

  • Your child must have earned income. You can’t create a Roth IRA for your child until he or she starts working and can’t contribute more than his or her earned income.
  • A parent can usually control how 529 plan money is used. A child normally has unlimited access to his or her Roth IRA.

Can you use a 529 plan to buy a house?

Buying a house generally won’t count as a qualified educational expense even though you need housing. Mortgage payments are usually considered a loan repayment not a room and board expense.

A student renting from a parent may be a qualifying educational expense if the rent is fair market value. Talk to a tax accountant before you consider this.

If you want to withdraw money from a 529 plan for a down payment, you’ll usually need to pay taxes and penalties as an unqualified withdrawal.

Can a 529 plan be used for part-time students?

You can generally always use a 529 plan for tuition, books, and other costs directly related to eligible coursework. There is no minimum number of hours of enrollment to use your 529 plan for these costs.

Where a 529 plan does have limits is for things like room and board. You generally need to be enrolled at least half-time to use a 529 plan for living expenses.

College Prep

Are exam fees tax-deductible?

Fees for AP exams, SAT, ACT, MCAT, LSAT, GMAT, and other college entrance or graduate school exams are generally not tax-deductible. Even though they’re related to school, they don’t fall under tuition or other qualified educational expenses.

Are college application fees tax- deductible?

College application fees are generally not tax-deductible. The tax law lists specific deductible education expenses, usually related to while you’re enrolled in school, and college application fees don’t fall into any of the listed categories of deductions.

College Scholarships

Are college scholarships taxable?

College scholarships may be taxable to the student.

Scholarships are not taxable when they are for tuition and fees to enroll in courses or for required fees, books, supplies, and equipment for those courses.

Scholarships are taxable when they are for room, board, and discretionary items. This can include scholarships that are specifically for these purposes or scholarships that are in excess of non-taxable expenses.

For example, you get a $15,000 scholarship and have $10,000 in tuition. You get the $5,000 as a refund and can spend it on room, board, or other expenses while you’re in school. $10,000 is not taxable and $5,000 is taxable.

Are GI Bill benefits taxable?

GI Bill benefits are generally not taxable at all. This includes your BAS and BAH benefits.

GI Bill benefits are under a separate law from the usual scholarship tax rules, so the usual scholarship rules making things like room and board payments taxable don’t apply.

Note: If you’re taking other education credits or deductions, you can usually only claim expenses you paid out-of-pocket and not the portions of any expenses covered by your GI Bill. In other words, if you had $5,000 in qualified expenses and the GI Bill covered $4,000, you can usually only claim $1,000 in qualified expenses.

Do college scholarships count towards your AGI?

The taxable part of a college scholarship counts towards your Adjust Gross Income (AGI) along with income from a job, trading account, or other sources.

This might affect your eligibility for tax credits with income limits such as the American Opportunity Tax Credit or Lifetime Learning Credit.

Does a scholarship count as income?

A scholarship can count as income depending on the circumstances. For taxes, see above.

If you need to rent an apartment while you’re in school, many landlords will count the room and board portion of your scholarship as part of your qualifying income. If you’re trying to take out a car loan or mortgage, your scholarship probably won’t count as income since it’s only temporary.

What if you provide services to the school?

If you have to provide services to the school, such as teaching, to receive a scholarship, it’s generally considered a stipend not a scholarship for tax purposes. This is taxable income even if it goes towards tuition, books, or similar expenses.

Are athletic scholarships taxable?

Being a student-athlete is not considered performing a service to the school like teaching or work-study programs are. Athletic scholarships are treated similarly to academic or needs-based scholarships.

Your athletic scholarship isn’t taxable if it goes towards towards the usual non-taxable expenses. If it goes towards other expenses, including if you receive more in scholarship money than your non-taxable expenses, that portion becomes taxable.

If you receive an NIL deal for playing a college sport, that income generally is taxable.

Does a college scholarship change whether you’re a dependent?

A college scholarship doesn’t directly change whether you’re a dependent. To be a dependent, your parents need to provide more than half of your support.

To determine who paid for more than half of your support, you look at things like money you got from a job and money your parents gave you. Scholarships don’t count when determining support.

However, if your parents aren’t giving you money because you have a scholarship, it’s more likely that you’re providing more than half of your support.

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