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Individual K–12 Tax Credits & Deductions

Individual tax credits and deductions allow parents to receive state income tax relief for approved educational expenses, which can include private school tuition, books, supplies, computers, tutors and transportation. Tax credits lower the total taxes a person owes; a deduction reduces a person’s total taxable income.

Watch the short video below to see how individual K–12 education tax credits and deductions work for families.

Ten States with Individual Tax Credit/Deductions

Check out the list below for quick links to those program details, which include approved expense types, family eligibility tests, participation numbers, funding amounts and more.

• Alabama Accountability Act of 2013 Parent-Taxpayer Refundable Tax Credits >
• Illinois Tax Credits for Educational Expenses >
• Indiana Private School/Homeschool Deduction >
• Iowa Tuition and Textbook Tax Credit >
• Louisiana Elementary and Secondary School Tuition Deduction >
• Minnesota Education Deduction >
• Minnesota K–12 Education Credit >
• Ohio K–12 Home Education Tax Credit >
• Ohio K–12 Nonchartered Private School Tax Credit >
• Oklahoma Oklahoma Parental Choice Tax Credit Act  >
• South Carolina Refundable Educational Credit for Exceptional Needs Children >
• Wisconsin K–12 Private School Tuition Deduction >

Do you know how many taxpayers across the country are using individual K–12 education tax credit and deduction programs? For more little-known truths about these programs, visit our individual tax credit and deduction fast facts.

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11 Education Tax Credits and Deductions [2023 + 2024]

Reviewed by

Riley adams, cpa.

Disclosure: We scrutinize our research, ratings and reviews using strict editorial integrity. In full transparency, this site may receive compensation from partners listed through affiliate partnerships, though this does not affect our ratings. Learn more about how we make money by visiting our advertiser disclosure .

Want a higher paying job? A college education might make that possible. Want to get into a better college? Perhaps attending a private high school will help. Is it time for a career change? A vocational school might be for you.

Education can certainly be a path to greater financial success and security, but it can be pricey. Fortunately, there’s a full menu of education tax credits, deductions, and exemptions to help you pay common school-related expenses.

From the time a parent starts saving for a child’s education to the date a student finally pays off their student loans, Uncle Sam has something up his sleeve that will help parents, students, and others cut their tax bill. There aren’t very many other aspects of American life that get as many tax breaks, which just goes to show how important education is in our society.

So you don’t miss out on any of the potential tax benefits, I pulled together a list of all the education tax breaks available under the federal tax code. Dive in and see how many education tax credits, deductions, and exemptions you can claim. And be sure to take advantage of all the tax breaks for which you qualify, so you can reach your full intellectual and financial potential.

Related: What’s Your Standard Deduction?

Table of Contents

1. 529 Plans

Let’s start at the beginning: saving money for a future student’s educational expenses, particularly for college.

The most popular way to save for college these days is with a 529 plan . While there are no federal tax breaks available when you open or fund a 529 plan, there are clear tax advantages down the road.

YATI Tip: Many states offer income tax deductions or credits for contributions to a 529 plan. You often have to contribute to an in-state 529 plan to qualify for a state tax break, but a few states offer a tax benefit for contributions to any 529 plan. Check with the state tax agency where you live for details.

With a 529 savings plan , which is the most common type of 529 plan, you contribute money to an account set up for a designated beneficiary (such as a child or grandchild), that money grows tax-free, and withdrawals from the account are also tax-free as long as the funds are used for 529 plan qualified education expenses .

When it comes to college costs, qualified higher education expenses for 529 plan purposes include:

• Tuition, fees, books, supplies, and equipment required for the enrollment or attendance
• Room and board for students who are attending on at least a half-time basis
• Services for special-needs students
• Computers or peripheral equipment, software, and internet access used primarily by an enrolled student

These higher education expenses can be paid to any college, university, vocational school, or other post-secondary educational institution eligible to participate in federal student aid programs.

529 plans aren’t just for college expenses, though. For instance, you can use up to $10,000 from a 529 savings plan to pay tuition at any public or private (including religious) elementary or secondary school.

Up to $10,000 can also be used to pay off student loans for the beneficiary or a sibling.

Money from a 529 plan can also be used for fees, books, supplies, and equipment required for participation in a registered and certified apprenticeship program.

YATI Tip: Some states don’t follow the federal rules for elementary and secondary school tuition, student loan payments, or apprenticeship programs. As a result, 529 account funds used for these purposes might be subject to state income tax.

If 529 plan funds aren’t used for qualified education expenses, a 10% penalty applies and related earnings are considered taxable income subject to the same federal income tax rates as wages, tips, unemployment compensation, gambling winnings, and other “ordinary” income.

To avoid federal income tax and penalties, you can transfer unused funds to a family member’s 529 account or ABLE account. Plus, starting in 2024, a beneficiary can roll over up to $35,000 of leftover money in a 529 savings plan that’s been open for at least 15 years into a Roth IRA in his or her own name.

Finally, some states also offer a prepaid tuition plan , which is a type of 529 plan. With a prepaid tuition plan, you pay future college tuition and fees at current rates. As with a 529 savings plan, there’s no tax deduction for contributions to a prepaid tuition plan, but there’s also no tax on earnings or distributions for qualified educational expenses.

Related: Best Alternatives to 529 Plans [Other College Savings Options]

529s with Backer

• Available: Sign up here
• Price: Flat fee of $1.99 per contribution

A great 529 plan option to consider is Backer . Backer—a hassle-free 529 savings plan where your family and friends can play a role—has helped families save more than $30 million toward college in just minutes.

You can use the 529 plan to put your child on track to afford college; all while remaining invested in an asset class that will grow over time.

Backer allows you to invest in a portfolio of low-cost index funds that track major indexes of large company stocks (S&P 500), small-cap stocks (Russell 2000) international company shares (MSCI EAFE Index), and U.S. government bonds (Barclays Aggregate Bond Index).

• Backer allows you to invest your educational savings tax-free in a 529 plan and also allows for family and friends to help you to save more.
• Use low-cost index funds to invest in different asset classes, including stocks and bonds.

Related: 30 Tax Statistics and Facts That Might Surprise You

2. Coverdell Education Savings Accounts (ESAs)

Like a 529 plan, a Coverdell Education Savings Account (ESA) can be used to save for educational expenses.

From a tax perspective, Coverdell ESAs work the same way as 529 savings plans. There are no tax breaks when you put money in a Coverdell ESA, but money in the account grows on a tax-free basis and withdrawals are likewise not taxed if they’re used for qualifying educational expenses. If funds aren’t used for qualified expenses, then taxes must be paid on related earnings and a 10% penalty applies.

There are some important differences between Coverdell ESAs and 529 plans , though. For example, unlike 529 plans, with a Coverdell ESA:

• Contributions must be made before the beneficiary is 18 years old (except in the case of a special needs beneficiary).
• Annual contributions per beneficiary are limited to $2,000.
• The $2,000 annual contribution limit is gradually reduced to $0 if the contributor’s modified adjusted gross income (AGI) is between $95,000 and $110,000 ($190,000 to $220,000 for married couples filing a joint tax return).
• Funds in the account must be distributed within 30 days after the beneficiary reaches age 30 (except in the case of a special needs beneficiary).
• There’s no limit on distributions used for elementary or secondary school expenses.

Because of the additional restrictions on contributions, Coverdell ESAs aren’t as popular as 529 plans. However, if you’re saving for elementary or secondary school expenses, a Coverdell ESA might be a better option because there’s no limit on distributions for these expenses. Money from a Coverdell ESA can also be used for more than just tuition if your child is attending a private K-12 school.

Related: Child Tax Credit FAQs [What Every Parent Needs to Know]

3. IRA Withdrawals for Education Expenses

Some people use individual retirement accounts ( IRAs ) to pay for college. That’s not always the best plan, but it works in some situations.

For example, using an IRA to cover college costs might be your best option if you suddenly realize that your high-school-age child might go to college, you haven’t started saving for college expenses, and you already have a well-funded IRA.

Furthering your own education later in life is another potential scenario where using IRA funds to pay for college or vocational school might make sense. (Just make sure you still have enough money for retirement!)

But what makes IRAs an attractive option for education savings? It’s because the normal 10% penalty for early withdrawals—generally before you turn 59½ years old—is waived if the money is used on qualified higher education expenses for:

• Your spouse
• Your or your spouse’s child, foster child, or adopted child
• Your or your spouse’s grandchild

Expenses that qualify for the penalty waiver are generally the same as those allowed for 529 plan funds, except the waiver doesn’t apply if IRA funds are used for K-12 tuition, student loan repayment, or apprenticeship programs.

Regardless of whether the 10% early distribution penalty is imposed, distributions from a traditional IRA are also generally subject to federal income tax (although you can get a tax deduction when you contribute to a traditional IRA). If you withdraw money from a Roth IRA, income taxes apply to any portion of the distribution that represents earnings if you have not yet reached age 59½. (No tax applies to withdrawn contributions to a Roth IRA.)

YATI Tip: In addition to any other available tax breaks, you might also qualify for the Saver’s Credit when you contribute to an IRA. This tax credit can be worth up to $1,000 ($2,000 for married couples filing a joint return).

Related: Roth IRA vs. 529 Plan: Which Is Better For College Savings?

4. Scholarships, Grants, and Other Types of Educational Assistance

Congratulations if you’re lucky enough to get a scholarship, grant, or other form of educational assistance ! As a bonus, you might not have to pay tax on the amount awarded.

For example, if you’re a candidate for a degree at an eligible educational institution, a scholarship or fellowship grant is generally tax free if it:

• Doesn’t exceed your qualified education expenses
• Isn’t designated or earmarked for something other than qualified education expenses (e.g., room and board)
• Doesn’t specify that it can’t be used for qualified education expenses
• Doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship or grant.

For purposes of tax-free scholarships and fellowship grants, qualified education expenses include:

• Tuition and fees required to for enrollment or attendance
• Course-related expenses (e.g., fees, books, supplies, and equipment)

Expenses that don’t qualify include room and board, travel, research, clerical help, and equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution.

YATI Tip: Pell grants and other need-based grants are treated as scholarships for tax purposes. However, an appointment to a U.S. military academy (e.g., West Point, Naval Academy, etc.) isn’t considered to be a scholarship or fellowship grant. As a result, payments received by cadets and midshipmen at a services academy are taxable income.

Other forms of assistance might also be tax free. For instance, payments to veterans from the Department of Veterans Affairs for education, training, or subsistence aren’t taxed.

You might also be able to avoid a tax bill if your tuition is reduced or completely waived. For an undergraduate student or someone attending a K-12 school, a tuition reduction or waiver is tax-free only if you’re either:

• An employee of the school
• A former employee of the school who retired or left on disability
• A surviving spouse of someone who died while an employee of the school or who retired or left on disability
• A dependent child or spouse of a person described above

If you’re attending graduate school, you must teach or do research for your school for a tuition reduction or waiver to be tax free. Otherwise, any tuition reduction or waiver that’s payment for your services is taxable.

Related: How to Find Scholarships

5. American Opportunity Tax Credit

The American Opportunity tax credit is one of the best-known tax breaks for college expenses. The credit is worth up to $2,500 per eligible student (you, your spouse, or a dependent). Plus, up to 40% of the credit is refundable, which means that you can receive a tax refund for the refundable portion even if your pre-credit tax bill is less than the overall credit amount.

The credit has several restrictions and limitations, though. For example, it’s typically only available for undergraduate college students. That’s because the credit is only allowed if the student hasn’t completed the first four years of postsecondary education before the tax year started, and it’s only available for four tax years per eligible student.

The student must also be pursuing a degree or other recognized education credential, and be enrolled on at least a half-time basis for at least one academic period beginning during the tax year (or the first three months of the following year if the qualified expenses were paid during the tax year). A student who has been convicted of a felony for possessing or distributing a controlled substance can’t claim the credit, either.

You must also satisfy income limits to claim the American Opportunity tax credit. The credit is gradually reduced to zero if your modified adjusted gross income is between $80,000 and $90,000 ($160,000 to $180,000 if you’re married filing jointly).

In addition, you can’t claim the credit at all if your filing status is married filing separately or you’re claimed as a dependent on someone else’s tax return.

Eligible expenses for purposes of the American Opportunity tax credit include tuition and certain expenses required for enrollment or attendance at an eligible educational institution, such as student activity fees or books, supplies, and equipment needed for class. They don’t include room and board, transportation costs, insurance, medical expenses (e.g., student health fees), living expenses, and the like.

The tax code also prevents “double dipping” for those who claim the credit. So, for instance, you can’t:

• Deduct the same higher education expenses used to claim the American Opportunity credit elsewhere on your tax return (e.g., as a business expense)
• Use the same expenses used to claim the American Opportunity credit to claim the Lifetime Learning credit ( see below )
• Figure the tax-free portion of a distribution from a 529 plan or Coverdell ESA using the same expenses used to claim the American Opportunity credit
• Claim the American Opportunity credit using qualified education expenses paid with tax-free educational assistance (e.g., scholarships, grants, or assistance provided by an employer)

Related: Earned Income Tax Credit: How Much, Eligibility + More

6. Lifetime Learning Credit

There’s another great education credit available for people who are actual students during the tax year—the Lifetime Learning credit . While the maximum credit amount ($2,000 per eligible student) isn’t as high and it isn’t refundable, the Lifetime Learning credit is available to many more people than the American Opportunity tax credit.

The Lifetime Learning credit can be claimed for qualified educational expenses for undergraduate, graduate, or professional degree courses—including courses to acquire or improve job skills. You don’t need to be pursuing a degree or other credential, though. You can also claim the credit for just one course, since there’s no half-time student requirement.

There’s also no limit on the number of years you can claim the Lifetime Learning credit, and you don’t have to claim the credit in any set number of consecutive years as you do with the American Opportunity credit. A felony drug conviction doesn’t prevent you from claiming the credit, either.

As with the American Opportunity tax credit, you can claim the credit for eligible expenses incurred by you, your spouse, or a dependent. The list of eligible expenses is basically the same for both the American Opportunity and Lifetime Learning credits (e.g., tuition and related expenses)—although the Lifetime Learning credit applies to a wider variety of classes and training.

The same income limits apply to both the American Opportunity and Lifetime Learning credits. Thus, the Lifetime Learning credit is gradually reduced to zero if your modified adjusted gross income is between $80,000 and $90,000 ($160,000 to $180,000 if you’re married filing jointly).

Also, as with the American Opportunity tax credit, you can’t claim the Lifetime Learning credit if you use the married filing separately filing status on your tax return.

The same types of “double dipping” restrictions established for the American Opportunity tax credit also exist for the Lifetime Learning credit. Thus, you can’t:

• Deduct the same higher education expenses used to claim the Lifetime Learning tax credit elsewhere on your tax return (e.g., as a business expense)
• Use the same expenses used to claim the Lifetime Learning tax credit to claim the American Opportunity tax credit
• Figure the tax-free portion of a distribution from a 529 plan or Coverdell ESA using the same expenses used to claim the Lifetime Learning tax credit
• Claim the Lifetime Learning tax credit using qualified education expenses paid with tax-free educational assistance (e.g., scholarships, grants, or assistance provided by an employer)

Related: IRS Delays 1099-K Rules: What PayPal, Venmo, StubHub Users Need to Know

7. Series EE and I Savings Bonds

When you cash in a Series EE or I savings bond , you get your principal back, plus interest. The interest is usually taxed at the federal level, but generally not subject to state or local income tax. If you’re the bond holder, you can choose to pay the federal tax each year you earn interest, or wait to pay tax on all the interest when you cash in the bond.

But here’s where Series EE and I bonds make it to our list of education tax breaks: If the money is used for qualifying educational expenses, you won’t have to pay any tax on the interest, as long as all of the following requirements are satisfied:

• You were at least 24 years old when the bonds were issued.
• Your modified adjusted gross income is less than the cutoff amount for the year in which you claim the exclusion. (For 2023, the cutoff amount is $167,800 for joint filers and $106,850 for everyone else; $175,200 and $111,800, respectively, for 2024.)
• You cash in the savings bonds in the same tax year for which you claim the exclusion.
• You paid qualified higher education expenses to an eligible institution that same year.
• The expenses were for yourself, your spouse, or someone you list as a dependent on your federal income tax return.
• You don’t use the married filing separately filing status on your federal tax return.

For 2023, you’ll have to pay tax on part of the interest if your modified adjusted gross income is between $137,800 and $167,800 for joint filers ($145,200 to $175,200 for 2024), and between $91,850 and $106,850 for other people ($96,800 to $111,800 for 2024).

For this tax exemption, qualified expenses include:

• Tuition and fees required to enroll at or attend any college, university, vocational school, or other post-secondary educational institution eligible to participate in federal student aid programs
• Contributions to a 529 plan
• Contributions to a Coverdell ESA

Room and board or expenses for courses involving sports, games, or hobbies that aren’t part of a degree or certificate-granting program don’t count.

YATI Tip: Since the bond holder must be at least 24 years old when a bond is issued to take advantage of this tax break, it doesn’t necessarily help younger adults who hold savings bonds to pay for college expenses. However, a parent can cash a bond and then put the money in a 529 plan or Coverdell ESA for their young child and avoid tax on the bond interest.

U.S. savings bonds are a pretty safe investment option . They’re also easy to purchase online at TreasuryDirect . You can also use IRS Form 8888 to purchase up to $5,000 of Series I bonds with a tax refund.

Related: Best Investments for Teenagers

8. Business Expense Deduction for Work-Related Education

A special business expense deduction is available for self-employed people, military reservists, certain artists, and certain government officials who spend their own money on work-related education. Taxpayers with a disability can also deduct impairment-related expenses (e.g., a sign language interpreter if you’re deaf) that are necessary to participate in a work-related education program as an itemized deduction.

To claim a deduction for work-related education, the education in question must satisfy one of the following requirements:

• It’s required to keep your present salary, status, or job, and serves a bona fide business purpose of your employer.
• It maintains or improves skills needed in your present work.
• Qualifying work-related education expenses can be deducted as a business expense even if the education could lead to a degree.

Even if the education meets one or both of the requirements above, it isn’t qualifying work-related education if at least one of the following is true:

• It’s needed to meet the minimum educational requirements of your present trade or business.
• It’s part of a program of study that will qualify you for a new trade or business.

If the education in question qualifies as work-related education, you can deduct:

• Tuition, books, supplies, lab fees, and similar items
• Related transportation and travel costs (but not expenses for travel, meals, or lodging while you’re away from home overnight)
• Other related expenses, such as costs of research and typing when writing a paper as part of an educational program

Personal expenses aren’t tax deductible. For example, you can’t deduct the dollar value of vacation time taken to attend a class. You also can’t deduct work-related education expenses if you benefit from these expenses under any other provision of the law, or the expenses are paid with tax-free scholarships, grants, or employer-provided educational assistance.

Related: Estimated Tax Payment Due Dates

9. Employer-Provided Educational Assistance

Your employer might offer to help you further your education … or even pay off your student loan. The good news is that you don’t have to pay tax on up to $5,250 of educational assistance benefits you receive from your employer each year. (The benefits must be offered through a written educational assistance program .)

So, what types of educational benefits qualify for this tax exemption? Payments for tuition, fees, books, supplies, and equipment qualify. So do payments through 2025 by an employer for a worker’s student loan debt.

Any form of instruction or training that improves or develops your capabilities counts. The education doesn’t have to be work-related or part of a degree program, either.

The exclusion doesn’t apply to employer payments for:

• Meals, lodging, or transportation
• Tools or supplies (other than textbooks) that you can keep
• Courses involving sports, games, or hobbies unless they’re related to your employer’s business or are required as part of a degree program

You must pay tax on any employer-provided educational assistance over the $5,250 annual cap, unless it qualifies as a working condition fringe benefit (i.e., it could be deducted as a business expense if you paid for it). Any taxable amount will be added to your wages on your W-2 form .

Related: Capital Gains Tax: What Is It, Rates, Home Sales + More

10. Student Loan Interest Deduction

Millions of Americans end up taking out student loans to pay for college or graduate school. But now that the pandemic-related “pause” is over, those loans have to be paid back, with interest, in most cases. The required student loan payments can be a heavy financial burden that weighs you down for years. However, the good news is that the student loan interest deduction offers some tax relief.

The maximum deduction for student debt interest payments is $2,500 per year. However, for the 2023 tax year, the full deduction is gradually reduced to zero if your modified adjusted gross income is between $75,000 and $90,000 ($155,000 to $185,000 for married couples filing a joint return). You can’t claim the deduction if you use the married filing separately filing status or can be claimed as a dependent on someone else’s tax return for the year. For 2024, the phase-out range is $80,000 to $95,000 ($165,000 to $195,000 for joint filers).

To claim the deduction, the interest you pay must be on a qualified student loan. Qualified student loans are taken out solely to pay qualified educational expenses that were:

• For you, your spouse, or a person who was your dependent when you took out the loan
• Paid or incurred within a reasonable period of time before or after you took out the loan
• For education provided during an academic period for a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential

Loans from a relative or from a 401(k) plan don’t count.

For purposes of this deduction, qualified educational expenses include:

• Tuition and fees
• Room and board
• Books, supplies, and equipment
• Other necessary expenses (e.g., transportation)

The expenses must also be paid to a college, university, vocational school, or other post-secondary educational institution eligible to participate in federal student aid programs.

As with other education tax credits and deductions, you can’t “double dip.” So, for example, you can’t claim the deduction for any interest paid with earnings from a 529 plan if the earnings aren’t taxed because they’re used to pay student loan interest. The deduction also doesn’t apply to any interest paid by your employer before 2026 under an educational assistance program.

YATI Tip: If you’re the person legally obligated to make interest payments, but someone else (e.g., a parent) makes a payment on your behalf, you can still claim the student loan interest deduction. In this situation, it’s treated as if you received the payment from the other person and then paid the interest yourself.

Related: Best Ways to Invest While a College Student

11. Student Loan Forgiveness and Repayment Assistance

Normally, if a debt is canceled or paid for you, you must pay tax on the amount that was canceled or paid on your behalf. However, from 2021 through 2025, most people can exclude this amount from their taxable income if all or part of their student loan is forgiven . This includes private student loans that aren’t insured or guaranteed by the government.

In addition, canceled student loan debt generally isn’t taxed if it’s canceled because of a provision in the loan agreement requiring cancellation if you work for a certain period of time in certain professions for any of a broad class of employers.

If someone gives you money to pay off your student loan (instead of having your loan canceled), those payments are also excluded from your gross income if they’re received from either:

• The National Health Service Corps Loan Repayment Program
• A state education loan repayment program eligible for funds under the Public Health Service Act
• Any other state loan repayment or forgiveness that provides increased availability of health services in underserved or health professional shortage areas
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Rocky has been covering federal and state tax developments for over 25 years. During that time, he has provided tax information and guidance to millions of tax professionals and ordinary Americans. As Senior Tax Editor for Young and the Invested from Jan. 2023 to Feb. 2024 , Rocky spent most of his time writing and editing online tax content.

Before working for Young and the Invested , Rocky was a Senior Tax Editor for Kiplinger, where he wrote and edited tax content for Kiplinger.com, Kiplinger’s Retirement Report and The Kiplinger Tax Letter . Prior to his time at Kiplinger, Rocky was a Senior Writer/Analyst for Wolters Kluwer Tax & Accounting. In that role, he managed a portfolio of print and digital state income tax research products, led the development of various new print and online products, authored white papers and other special publications, coordinated with authors of a state tax treatise, and acted as media contact for the state income tax group (where he was quoted as an expert by USA Today , Forbes , U.S. News & World Report , Reuters , Accounting Today , and other national media outlets). Before that, Rocky was an Executive Editor at Kleinrock Publishing, which provided tax research products for tax professionals. At Kleinrock, he directed the development, maintenance, and enhancement of all state tax and payroll law publications, including electronic research products, monthly newsletters, and handbooks.

Rocky has a law degree from the University of Connecticut and a B.A. in History from Salisbury University.

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Frequently asked questions about educational assistance programs

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FS-2024-22, June 2024

This fact sheet provides answers to frequently asked questions (FAQs) related to educational assistance programs under section 127 of the Internal Revenue Code (Code) (a section 127 educational assistance program).

These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs may not address any particular taxpayer’s specific facts and circumstances, and they may be updated or modified upon further review. Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of these FAQs will be maintained on IRS.gov to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so .

More information about reliance is available . These FAQs were announced in IR-2024-167 .

Background on educational assistance programs

You may exclude certain educational assistance benefits from your gross income if they are provided under a section 127 educational assistance program. That means that you won’t have to pay any tax on the amount of benefits up to $5,250 per calendar year and your employer should not include the benefits with your wages, tips and other compensation shown in box 1 of your Form W-2. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the lifetime learning credit. If any benefits are received under a program that does not comply with section 127 or if the benefits are over $5,250, the amounts may be excluded under section 117 or deducted under section 162 or section 212 if the requirements of such section are satisfied.

Amounts paid under a section 127 educational assistance program are generally deductible by the employer as a business expense under section 162.

Questions and answers on educational assistance programs

Q1. what is an educational assistance program.

A1. An educational assistance program is a separate written plan of an employer for the exclusive benefit of its employees to provide employees with educational assistance.

To qualify as a section 127 educational assistance program, the plan must be written, and it must meet certain other requirements. Your employer can tell you whether there is a section 127 educational assistance program where you work.

A sample plan for employers PDF is available. An employer may tailor its plan to include, for example, conditions for eligibility, when an employee’s participation in the plan begins and prorated benefits for part-time employees. However, a program cannot discriminate in favor of officers, shareholders, self-employed or highly compensated employees in requirements relating to eligibility for benefits.

Q2. What are educational assistance benefits?

A2. Tax-free educational assistance benefits under a section 127 educational assistance program include payments for tuition, fees and similar expenses, books, supplies and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses.

Tax-free educational assistance benefits also include principal or interest payments on qualified education loans (as defined in section 221(d)(1) of the Code). Section 127 requires that such loans be incurred by the employee for the education of the employee and not for the education of a family member such as a spouse or dependent. These payments must be made by the employer after March 27, 2020, and before January 1, 2026 (unless extended by future legislation). The payments of any qualified education loan can be made directly to a third party such as an educational provider or loan servicer or directly to the employee, and it does not matter when the qualified education loan was incurred. A qualified education loan is generally the same as a qualified student loan. See Qualified Student Loan in Chapter 4 of Publication 970, Tax Benefits for Education.

Educational assistance benefits do not include payments for the following items:

• Meals, lodging or transportation.
• Tools or supplies (other than textbooks) that you can keep after completing the course of instruction (for example, educational assistance does not include payments for a computer or laptop that you keep).
• Have a reasonable relationship to the business of your employer, or
• Are required as part of a degree program.

An employer may choose to provide some or all of the educational assistance described above. The terms of the plan may limit the types of assistance provided to employees.

Q3. What is the total amount that an employee can exclude from gross income under section 127 of the Code per year?

A3. Under section 127, the total amount that an employee can exclude from gross income for payments of principal or interest on qualified education loans and other educational assistance combined is $5,250 per calendar year. For example, if an employer pays $2,000 of principal or interest on any qualified education loan incurred by the employee for the education of the employee, only $3,250 is available for other educational assistance.

The annual limit applies to amounts paid and expenses incurred by the employer during a calendar year. If an employee seeks reimbursement for expenses incurred, the expenses must be paid by the employee in the same calendar year for which reimbursement is made by the employer, and the expenses must not have been incurred prior to employment (however, qualified education loans may be incurred by the employee in prior calendar years and prior to employment, and payments of principal and interest may be made by the employer in a subsequent year). “Unused” amounts of the $5,250 annual limit cannot be carried forward to subsequent years.

Q4. What is a qualified education loan?

A4. A qualified education loan (as defined in section 221(d)(1)) is a loan for education at an eligible educational institution. Eligible educational institutions include any college, university, vocational school or other postsecondary educational institution as defined in sections 221(d)(2) and 25A(f)(2). The Department of Education determines whether an organization is an eligible education institution. A loan does not have to be issued or guaranteed under a Federal postsecondary education loan program to be a qualified education loan.

Q5. How can payments of qualified education loans be made?

A5. In the case of payments made after March 27, 2020, and before January 1, 2026 (unless extended by future legislation), depending on how a particular employer has designed its section 127 educational assistance program, an employer may provide payments of principal or interest on an employee’s qualified education loans (as defined in section 221(d)(1) of the Code) for the employee’s own education directly to a third party such as an educational provider or loan servicer, or make payments directly to the employee.

Generally, the payment by an employer of principal or interest on any qualified education loan incurred by the employee for the education of the employee under section 127(c)(1)(B) is only available if an employer amends the terms of its plan to include the benefit. If the plan is currently written to provide generally for all benefits provided under section 127, then it is possible that the plan would not need to be amended to provide for the qualified education loan benefit under section 127(c)(1)(B).

Q6. Are employer payments of qualified education loans for spouses and dependents excluded from gross income under section 127 of the Code?

A6. Under section 127 of the Code, an educational assistance program must be provided for the exclusive benefit of employees. A program that provides benefits to the spouse or dependents (as defined in section 152) of an employee is not a section 127 educational assistance program. Spouses and dependents of employees who are also employees, or spouses and dependents of owners who are also employees, may receive benefits under the program, but they are subject to a rule that prohibits discrimination in favor of these employees in requirements relating to eligibility for benefits, and to a rule that limits the benefits that may be provided to them under the program to 5 percent of the benefits under the program.

Section 127 provides an exclusion from gross income for loan payments made by an employer after March 27, 2020, and before January 1, 2026 (unless extended by future legislation), on a qualified education loan incurred by the employee for the employee’s own education. Thus, a payment of principal or interest by the employer on a loan incurred by an employee for the education of the employee’s spouse or dependent may not be excluded from the employee’s gross income. In addition, a payment by the employer on a loan incurred by the parent of an employee for the education of the employee may not be excluded from the parent’s or the employee’s gross income.

Q7. Can student debt be reimbursed under a section 127 educational assistance program?

A7. Student debt may consist of a variety of expenses. If the debt was incurred as a result of expenses that are permissible benefits under section 127 of the Code (such as tuition, books, equipment, qualified education loans (in the case of payments made before January 1, 2026 (unless extended by future legislation)), etc.), the employer may reimburse the employee for these expenses as educational assistance benefits, and the employee could then use those funds to help satisfy his or her debt. To be excluded from the employee’s gross income, the employee must be prepared to substantiate the expenses to the employer.

Q8. Can self-employed individuals, shareholders and owners receive educational assistance under a section 127 educational assistance program?

A8. While there are no specific income limits for receiving educational assistance benefits, an educational assistance program must satisfy certain requirements under section 127 of the Code and Treasury Regulation § 1.127-2, including not being discriminatory in favor of employees who are highly compensated employees.

An individual who is self-employed within the meaning of section 401(c)(1) may receive educational assistance. While shareholders and owners may receive educational assistance, not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.

As a practical matter, if the owners are the only employees, they cannot receive educational assistance under section 127 because of the 5 percent benefit limitation described above. The following formula can be used to determine the amount of educational assistance that an owner/employee can receive: [total amount of educational assistance provided to employees other than the owner/employee] x .05263158 = [amount of educational assistance that the owner/employee can receive (rounded down to two decimal places but not greater than $5,250)].

Q9. Are there other exclusions from gross income for educational assistance?

A9. Working condition fringe benefit: If the benefits qualify as a working condition fringe benefit, regardless of amount, they are excluded from your gross income and your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in section 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.

Educator expense deduction: In 2023, educators can deduct up to $300 ($600 if married filing jointly and both spouses are eligible educators, but not more than $300 each) of unreimbursed business expenses. The educator expense deduction, claimed on Form 1040 Line 11, is available even if an educator doesn’t itemize their deductions. To do so, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

Those who qualify can deduct costs like books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom. Expenses for participation in professional development courses are also deductible. Athletic supplies qualify if used for courses in health or physical education.

For additional IRS resources see our tax topic on educator expense deduction .

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