| LP TAX & BOOKKEEPING PROS LLC RALPH PINNEY EA MCKINNEY, TX 75072 303-881-9762 |
| TAX YEAR 2026 Education Tax Benefits |
Education Tax Benefits
If you pay tuition, fees, and other costs for attendance at an eligible educational institution for yourself, your spouse, or your dependent, you may be able to take advantage of one or more of the education tax benefits — and now, a new savings vehicle created by recent federal legislation.
You can claim more than one education benefit in a tax year as long as you do not use the same expenses for more than one benefit.
Exception: Qualified expenses used to claim education benefits can also be used to eliminate the 10% penalty on premature IRA distributions.
Education Deductions
Deductions reduce the amount of income subject to income tax. Deductions for education expenses include:
- Student loan interest deduction up to $2,500 from gross income. Income limitations apply.
- Business deduction on Schedule C or F. You may be able to deduct the cost of education related to a business or farm activity.
Education Tax Credits
Tax credits reduce the amount of income tax you may have to pay. Income limitations apply. The education credits are claimed on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).
- American Opportunity Credit, $2,500 maximum per student per year.
- Lifetime Learning Credit, $2,000 maximum per tax return per year.
If you are eligible for both credits you can choose which credit to claim, but both credits cannot be claimed for the same student for the same year.
Comparison of Education Credits
| American Opportunity Credit | Lifetime Learning Credit |
| Up to $2,500 per eligible student. | Up to $2,000 per tax return. |
| 100% of the first $2,000, plus 25% of the next $2,000 of qualifying expenses for each student. | 20% of the first $10,000 of total qualifying expenses. |
| 40% of the credit (up to $1,000) may be refundable. | Nonrefundable tax credit. |
| Eligible years: Until the first four years of postsecondary education are completed.Reduced by number of years the American Opportunity Credit and Hope Credit was claimed for the student. | Eligible years: All years of postsecondary education. |
| Qualifying expenses: Tuition, required enrollment fees, andCourse-related books, supplies, and equipment. The student must be pursuing an undergraduate degree or other recognized education credential. | Qualifying expenses: Tuition and required enrollment fees. The student need not be pursuing a degree or credential. |
| Student must be enrolled at least half-time for at least one academic period beginning during the year. | Student must be enrolled in at least one course. |
| Additional restrictions: The student can have no felony drug convictions.Taxpayer cannot use MFS status and cannot be claimed as a dependent by another person.The credit for taxpayers under age 24 may not be refundable. | Additional restrictions: None. |
Income limits. The American Opportunity Credit and the Lifetime Learning Credit are both phased out at modified AGI between $80,000 and $90,000 ($160,000 and $180,000 Married Filing Jointly).
Penalty-Free IRA Distributions
If you withdraw money from your IRA before you are age 59½, you are generally subject to a penalty of 10% of the distribution in addition to any tax that may be due on the distribution.
- The 10% penalty does not apply to traditional IRA or Roth IRA withdrawals if you use the money to pay qualified education expenses for yourself, spouse, or for any child or grandchild of yourself or your spouse.
- Qualified education expenses include tuition, fees, books, supplies, equipment, and special needs services required for enrollment or attendance at an eligible educational institution. Room and board for students enrolled at least half-time in a degree or certificate program may also qualify.
- Expenses must be reduced by tax-free scholarships and other tax-free assistance the student receives, but not by gifts or inheritances.
Education Savings Plans
Contributions that you make to education savings plans are not federally tax deductible, but the earnings accumulate tax free. In addition, no tax will be owed on distributions if they are less than the beneficiary’s qualified education expenses. Qualified expenses are reduced by scholarships, other tax-free assistance, and amounts used to calculate education credits.
- Qualified Tuition Programs (QTPs). States sponsor QTPs to allow prepayment of a student’s qualified higher education or elementary and secondary (K-12) education expenses. For information on a specific QTP, you need to contact the state agency or eligible educational institution that established and maintains it. If the QTP is being used for elementary and secondary education expenses, the limit for tax-free distributions is $20,000 per year. This limitation applies on a per-student basis, rather than a per-account basis, and does not apply to distributions used for college.
Note: QTPs are also called 529 Plans because they are authorized under section 529 of the Internal Revenue Code. Unused 529 funds may also be rolled into a Roth IRA for the beneficiary, subject to lifetime and annual limits.
- Coverdell Education Savings Accounts (ESAs). A Coverdell ESA can be used to pay a student’s eligible K-12 expenses, as well as higher education expenses. Coverdell ESA contributions are limited to $2,000 total per year for each beneficiary, no matter how many accounts have been established or how many people are contributing.
Unless the beneficiary is a person with special needs, contributions to a Coverdell ESA must stop before the beneficiary reaches age 18 and the account balance must be distributed within 30 days after the beneficiary reaches age 30 (or dies, if earlier).
Exclusions From Gross Income
An exclusion from income means you do not report the benefit you receive as income and you do not pay tax on it, but you also cannot use that same tax-free benefit for a deduction or credit.
- You may exclude the part of scholarships, fellowships, and grants that you use for qualifying education expenses while you are a degree candidate.
- You may exclude up to $5,250 paid for you under a qualifying educational assistance plan. Additional amounts are included in your Form W-2 wage income, unless they are a working condition fringe benefit. This includes principal or interest of any qualified education loan of the employee.
- If you cash in qualified U.S. Savings Bonds to pay for eligible education expenses for yourself, spouse, or your dependent, you may be able to exclude the bond interest from income. Income and other limitations apply.
Coordination of Benefits
You may be able to increase the combined value of an education credit and certain educational assistance if the student chooses to include otherwise tax-free scholarships or fellowship grants in income in the year it is received.
| LP TAX & BOOKKEEPING PROS LLC RALPH PINNEY EA MCKINNEY, TX 75072 303-881-9762 |
| TAX YEAR 2026 Saving for Education: Your Options |
Comparing Your Education Savings Options
Families saving for a child’s education now have more choices than ever. Each option below has different rules for contributions, investments, and taxation — and many families use more than one at the same time.
- 529 Plans (QTPs). Remain the strongest option specifically for education. Contributions are not federally deductible, but earnings grow tax-free and qualified withdrawals for tuition, fees, books, and supplies are entirely tax-free. Many states also offer a state income tax deduction or credit for contributions.
- Coverdell ESAs. Offer similar tax-free treatment for K-12 and higher education expenses, but are capped at $2,000 per beneficiary per year and must generally be used by age 30.
- Custodial or Taxable Brokerage Accounts. No special tax advantages, but no restrictions on how the money is used. Earnings are generally taxed at capital gains rates, which can still be favorable compared to ordinary income tax rates.
- Trump Accounts. A new federal savings account for children, described in detail below. Not designed primarily for education, but flexible enough to be used for it.
Because these accounts are not mutually exclusive, a common strategy for children born between 2025 and 2028 is to open both a 529 plan (for education-specific savings) and a Trump Account (to capture the government’s $1,000 seed contribution and add long-term, flexible savings).
A Note on Timing
Contributions to Trump Accounts became available beginning July 4, 2026. If you have a child, grandchild, or dependent born in 2025 or later, this is a good time to review your overall education and savings strategy with our office.
The New Trump Account, Explained
The Working Families Tax Cuts (also known as the “One Big Beautiful Bill,” Public Law 119-21) created a new type of individual retirement account for children, officially known under Internal Revenue Code Section 530A and referred to as a “Trump Account.”
- Available for any child under age 18 with a valid Social Security number. An account is generally opened by a parent or legal guardian using IRS Form 4547.
- Children born between January 1, 2025, and December 31, 2028, receive a one-time $1,000 contribution from the U.S. Treasury as part of a pilot program.
- The period from the account’s opening until January 1 of the year the child turns 18 is called the growth period. Special rules apply only during this time.
Contribution Rules During the Growth Period
- Combined individual and employer contributions are limited to $5,000 per year (adjusted for inflation after 2027).
- Unlike a traditional IRA, there is no requirement that the child have earned income.
- Employers may contribute up to $2,500 per year per employee (or dependent) tax-free to the employee’s or dependent’s account; this counts toward the $5,000 combined limit.
- Contributions from state or local governments and qualifying tax-exempt organizations do not count toward the $5,000 limit.
- Individual contributions are made with after-tax dollars and are not deductible by the contributor or the child.
Investments and Withdrawals
- During the growth period, funds must be invested in a diversified index fund tracking U.S. stocks, with annual fees capped at 0.1% of the account balance.
- Withdrawals are generally not permitted during the growth period, except in the case of the beneficiary’s death.
- Once the child turns 18, the account converts into a standard traditional IRA, and ordinary IRA contribution and distribution rules apply going forward.
- Early withdrawals after age 18 (before 59½) are subject to the usual 10% penalty, with exceptions such as qualified higher education expenses and first-time home purchases.
Trump Account vs. 529 Plan — Key Differences
| Trump Account | 529 Plan |
| $5,000 combined annual contribution limit during growth period (indexed after 2027). | No federal annual contribution limit; large contributions may trigger gift tax reporting. |
| $1,000 federal seed contribution for children born 2025–2028. | No federal seed contribution; some states offer matching grants. |
| Withdrawals taxed as ordinary income when taken (like a traditional IRA); no special tax break for education use. | Qualified education withdrawals are entirely tax-free at the federal level. |
| Can be used for retirement, a first home, disaster recovery, or education after age 18. | Best suited for education; non-qualified withdrawals are taxed and penalized. |
| Investments restricted to a low-cost U.S. stock index fund during the growth period. | Choice among a menu of mutual fund and age-based portfolio options. |
Should You Open One?
A Trump Account can be a useful complement to — but generally should not replace — a 529 plan if your primary goal is funding college. The $1,000 government seed money and employer-match potential make it attractive as a low-cost way to start building wealth for a child from birth, with more flexibility than a 529 for non-education goals later in life. We are happy to review your family’s specific situation and help you decide how a Trump Account, 529 plan, and Coverdell ESA might work together in your overall plan.
This brochure contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information.
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Contact Us
There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following:
| Pension or IRA distributions.Significant change in income or deductions.Job change.Marriage.Attainment of age 59½ or 73. | Sale or purchase of a business.Sale or purchase of a residence or other real estate.Retirement.Notice from IRS or other revenue department.Divorce or separation.Self-employment.Charitable contributions of property in excess of $5,000. |