Qualified Higher Education Expenses: What They are, How They Work

What Is a Qualified Higher Education Expense (QHEE)?

The term qualified higher education expense (QHEE) refers to money paid by an individual for expenses like tuition, books, fees, and supplies to attend a college, university, or other post-secondary institution. These expenses can be paid by a student, spouse, parent(s), or another party such as a friend or another relative. The Internal Revenue Service (IRS) provides individuals with tax incentives with respect to qualified higher education expenses.

Understanding Qualified Higher Education Expenses (QHEEs)

Qualified higher education expenses are any amounts paid to cover the enrollment of a student at an accredited post-secondary institution. Expenses covered under this category include tuition, books, materials, supplies—including laptops or notebooks—and any other related expenses such as student activity fees. These costs can be paid by cash, check, credit card, or money from a loan.

QHEEs must be paid directly by the student themselves, their spouse, parents, another relative, or friend in order to qualify. These fees may or may not be paid directly to an eligible post-secondary institution. Eligible schools include private, public, for-profit, and nonprofit institutions. All schools send out a Form 1098-T—Tuition Statement for QHEEs to the student for tax purposes.

As mentioned above, QHEEs may provide individuals with a tax break in one of three possible ways. These include:

• Tax-free accounts such as a 529 Plan or Roth individual retirement account (IRA) when distributions are used to pay QHEEs
• Exempting early IRA withdrawals prior to age 59 ½ from the 10% early withdrawal penalty
• QHEEs deductions on annual tax returns

These tax breaks help reduce the financial burden of attending a college or university and are provided on expenses paid during semesters, trimesters, quarters, or summer school during the tax year or for the first three months of the next tax year.

Special Considerations

As noted above, qualified higher education expenses are defined as tuition, fees, books, supplies, and equipment needed to enroll or attend a level of education beyond high school. These expenses are important because they can determine whether or not you can exclude the interest off of a qualified savings bond from your taxable income. Expenses that do not qualify include insurance, medical expenses, student health fees, transportation, personal living expenses, or fees relating to sports activities.

Taxpayers may claim QHEEs for reimbursement under the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). The AOTC is capped at $2,500 per student, while the Lifetime Learning Credit is limited to $2,000 per tax return. Also note that the LLC is only available to taxpayers with a modified adjusted gross income (MAGI) of $80,000 or less, or $160,000 or less for married couples filing jointly.

Filers can use Form 8863—Education Credits to apply for both credits. It's important to note, however, that you can’t take more than one type of credit for the same student and the same expenses. So, you can't take the AOTC andthe LLC for the same student in the same tax year.