Education benefits can be excluded from income when they meet specific statutory requirements. These exclusions apply to scholarships, savings bond interest, education savings accounts, qualified tuition programs, and ABLE accounts.
Scholarships and Fellowships
A qualified scholarship is excluded from income when:
- The recipient is a degree candidate
- The funds are used for tuition, fees, books, supplies, or required equipment
Amounts used for room and board do not qualify.
Taxable Portions
A taxpayer must include in income any scholarship or fellowship that represents payment for:
- Teaching
- Research
- Other required services
This applies even if all degree candidates must perform the services.
Scholarship Prizes
A prize won in a contest is not a scholarship if the taxpayer is not required to use it for education. These amounts are taxable.
Non‑degree Candidates
Scholarships and fellowships are taxable if the recipient is not pursuing a degree.
Education Savings Bond Program
Under the Education Savings Bond Program, interest on redeemed U.S. savings bonds may be excluded when:
- The interest is used for qualified higher education expenses
- The taxpayer files MFJ (MFS does not qualify)
Qualified Bonds
- Series EE bonds issued after 1989
- Series I bonds
- Must be in the taxpayer’s name (or jointly with spouse)
- Taxpayer must be 24 or older before the issue date
Qualified Expenses
- Tuition and required fees
- Contributions to a 529 plan or Coverdell ESA
Books, room, board, and non‑degree sports/hobby courses do not qualify.
Reduction for Tax‑Free Benefits
Qualified expenses must be reduced by:
- Tax‑free scholarships
- Tax‑free ESA or 529 distributions
- Education credits
- VA education benefits
- Employer‑provided education assistance
- Qualified tuition reductions
Interest Exclusion Formula
If bond proceeds exceed qualified expenses:
MAGI Phase‑Out
Interest exclusion phases out based on filing status. (Values shown in your document: MFJ $149,250–$179,250; Single/HH/QSS $99,500–$114,500.)
Qualified Education Expenses (General Rules)
For Coverdell ESAs and 529 plans, qualified expenses include:
- Tuition, fees, books, supplies, equipment
- Room and board (if at least half‑time)
Room and board is limited to:
- The school’s published allowance, or
- Actual cost if living in school‑owned housing
Expenses must be adjusted for tax‑free benefits and education credits.
Room and board does not qualify for:
- Scholarships
- Fellowships
- Education credits
- Education savings bond program
Coverdell Education Savings Account (ESA)
A Coverdell ESA is a trust or custodial account used to pay qualified education expenses.
Key Rules
- No deduction for contributions
- Earnings grow tax‑deferred
- Distributions are tax‑free up to qualified expenses
- Contribution limit: $2,000 per beneficiary per year
- Contributions must be in cash
- Beneficiary must be under age 18 (unless special needs)
- Funds must be distributed by age 30 (unless special needs)
MAGI Limits
Contribution limit phases out between:
- $95,000–$110,000 (Single)
- $190,000–$220,000 (MFJ)
Qualified Tuition Programs (529 Plans)
A 529 plan allows taxpayers to prepay or contribute for a beneficiary’s education.
Tax Treatment
- Contributions are not deductible
- Earnings grow tax‑free
- Distributions are tax‑free when used for adjusted qualified education expenses
- Reported on Form 1099‑Q
Eligible Uses
- Higher education expenses
- Up to $10,000 per year for K–12 tuition
- Registered apprenticeship programs
- Up to $10,000 lifetime for student loan repayment (per beneficiary and per sibling)
Rollover to Roth IRA (SECURE 2.0)
Up to $35,000 lifetime may be rolled over from a 529 to a Roth IRA if:
- The 529 has been open 15+ years
- Rollover is trustee‑to‑trustee
- Amount does not exceed annual IRA contribution limit
- Beneficiary has earned income
MAGI limits do not apply to these rollovers.
ABLE Accounts (529A)
An ABLE account provides tax‑favored savings for individuals with disabilities.
Eligibility
Beneficiary must:
- Have a qualifying disability before age 26, and
- Either file a disability certification or receive SSI/SSDI
Key Rules
- Contributions must be in cash
- Annual limit = gift tax annual exclusion
- Earnings grow tax‑deferred
- Distributions are tax‑free up to qualified disability expenses
- Excess distributions are taxable + 10% penalty
- Rollovers allowed to another ABLE account for the beneficiary or eligible siblings
- Beneficiary may claim the Saver’s Credit
Additional Beneficiary Contributions
After reaching the annual contribution limit, the beneficiary may contribute additional amounts up to:
- The federal poverty line for a one‑person household, or
- Their earned income, whichever is less
529 to ABLE Rollovers
Allowed if:
- The ABLE account belongs to the beneficiary or a qualifying family member
- Rollover counts toward annual contribution limit