Dear Tax Talk, My son will attend a community college to get an associate degree in automotive technology. He is required to buy about $2,000 worth of tools for the classes. Since the tools are required, but not sold by the college, can I write those off as part of his education expenses for school?
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There are tax deductions, or write-offs, and tax credits to help defray the expenses of a dependent's higher education expenses. A write-off is a deduction that lowers your taxable income on which you calculate the tax that you owe for the year. A tax credit is a dollar-for-dollar offset to the taxes that you owe. Usually a credit is a varying percentage of the costs of the tax-favored expenditure -- in your case, education expenses.
There are numerous tax benefits available for educational expenses, but for purposes of answering your question we will stick with the following:
- American opportunity credit.
- Lifetime learning credit.
- Tuition and fees deduction.
In any one year you can only claim one of the above for the same student. The term "qualified education expenses" is used to describe the expenditures that are eligible for the credit or deduction.
For purposes of all three tax benefits, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. The principal difference among the three is how "certain related expenses" are defined.
For purposes of the American opportunity credit, expenses for books, supplies and equipment needed for a course of study are included in qualified education expenses, whether the materials are purchased from the educational institution.
The following example from Publication 970 illustrates the foregoing:
Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. William bought his books from a friend; Grace bought hers at College W's bookstore. Both are qualified education expenses for the American opportunity credit.
For purposes of the lifetime learning credit and the tuition and fees deduction, only related expenses billed by the institution are included as qualified education expenses. The following example from the same publication illustrates the difference:
Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified education expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution.
Based on the foregoing, the tool purchases will qualify as a related expense for the American opportunity credit only.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.