Qualified Higher Education Expenses (Source: IRS Publication 970 – February 15, 2022)
These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time, defined later.
The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.
- Tuition and fees.
- Books, supplies, and equipment.
Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.
Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts.
- The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
- The actual amount charged if the student is residing in housing owned or operated by the school.
**You may need to contact the eligible educational institution for qualified room and board costs.**
The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it’s to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn’t include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)
The expenses for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.
No more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary’s sibling. A sibling includes a brother, sister, stepbrother, or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary. You can’t deduct as interest on a student loan any amount paid from a distribution of earnings from a QTP after 2018 to the extent the earnings are treated as tax free because they were used to pay student loan interest.
A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.
Qualified Elementary and Secondary Education Expenses.
These are expenses for no more than $10,000 of tuition, incurred by a designated beneficiary, in connection with enrollment or attendance at an eligible elementary or secondary school.
*CAUTION – Illinois Qualified Expenses do not include expenses for:
- Tuition in connection with the Beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school, subject to an annual $10,000 per Beneficiary limit.
If a withdrawal is made for such purposes it may be a Federal Qualified Withdrawal and not be included in income for federal and Illinois purposes, but if an Illinois income tax deduction was previously claimed for Contributions to the Account all or part of that deduction may be added back to income for Illinois income tax purposes.
Please consult with your tax advisor.
Eligible Educational Institutions
Funds can be used at any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education’s Federal Student Aid (FSA) programs.
Refunds from Eligible Educational Institutions
If you receive a refund from an Eligible Educational Institution for Qualified Higher Education Expenses that were paid from money withdrawn from your Account, you can:
Pay For Other Qualified Higher Education Expenses
You can use the funds to pay other Qualified Higher Education Expenses incurred by that Beneficiary in the same calendar year.
Recontribute Refunded Amounts to a 529 Account
if a student receives a refund of Qualified Higher Education Expenses that were treated as paid by a 529 distribution, the student can recontribute these amounts into any 529 account for which they are the beneficiary within 60 days after the date of the refund. The amount recontributed cannot exceed the amount of the refund.
You should consult with your financial, tax or other advisor regarding your individual situation.
Money from a Bright Directions account can be paid directly to the account owner, directly to the beneficiary, to the account owner’s bank account, or to an eligible educational institution.
Payments to account owners, beneficiaries, and bank accounts
An account owner or custodian (under a state UGMA/UTMA) may request a withdrawal online or by downloading and submitting the Withdrawal Request Form.
Be sure to plan ahead when requesting a withdrawal. Generally, if a request is received in good order on a business day prior to the close of the markets (typically 3 p.m., central time), the investments will be sold at that day’s closing prices, and a check will be mailed the following business day. Please plan ahead and allow sufficient mail time. For withdrawals payable to the account owner’s bank account, please allow several business days for your bank to process the payment and credit your account.
Payments to eligible institutions
Bright Directions can also make payments directly to a college or university. Please note that some institutions may take up to three to seven business days to post payments to a student account. Please allow sufficient time for mail time and processing by the school.
Additional Considerations and Resources
The tax benefits afforded to 529 plans must be coordinated with other programs designed to provide tax benefits for meeting higher education expenses in order to avoid the duplication of such benefits. You should consult with a qualified tax advisor with respect to the various education benefits.
Taxable Portion of a Distribution
The part of a distribution representing the amount paid or contributed to a qualified tuition program doesn’t have to be included as income. This is a return of the investment in the plan. The designated beneficiary generally doesn’t have to include as income any earnings distributed from a qualified tuition program if the total distribution is less than or equal to adjusted qualified education expenses. To determine if your total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all qualified tuition program distributions for the tax year to the adjusted qualified education expenses. Adjusted qualified education expenses are the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes: the tax-free portion of scholarships and fellowship grants; veterans’ educational assistance; the tax-free portion of Pell grants; employer-provided educational assistance; and any other tax-free payments (other than gifts or inheritances) received as educational assistance.
Coordination With American Opportunity and Lifetime Learning Credits
An American Opportunity or Lifetime Learning Credit can be claimed in the same year the beneficiary takes a tax-free distribution from a qualified tuition program, as long as the same expenses aren’t used for both benefits. This means that after the beneficiary reduces qualified education expenses using tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.
Coordination With Coverdell Education Savings Account Distributions
If a designated beneficiary receives distributions from both a qualified tuition program and a Coverdell Education Savings Account in the same year, and the total of these distributions are more than the beneficiary’s adjusted qualified higher education expenses, the expenses must be allocated between the distributions. For purposes of this allocation, disregard any qualified elementary and secondary education expenses.
Coordination With Tuition and Fees Deduction
A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a qualified tuition program as long as the same expenses aren’t used for both benefits.
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