Can I Deduct College Tuition on My Taxes When Paid by a Tuition Savings Plan?

You can't double count tuition for both tax breaks and qualified tuition plan distributions.
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Qualified tuition plans offer you two ways to save for college: prepaying expenses at today's rates or contributing money to an account that grows tax free and, as long as you use the money for qualified expenses, lets you take tax-free distributions of all the money, including earnings. However, you'll run into complications if you want to use the same tuition expenses to both take a qualified distribution from your qualified tuition plans and claim a tax break.

No Double Dipping

You cannot double count your qualified education expenses, including tuition, for both the qualified tuition plan exclusion from income and an education tax benefit. For example, if you pay $20,000 in tuition with a $20,000 distribution from a qualified tuition plan and you exclude all of the earnings on the qualified tuition plan from your income, you can't also use all or any part of that same $20,000 to claim a tax break.

Dividing Costs

If you have more tuition expenses than you paid for with your qualified tuition plan, you can use the excess to claim the tuition and fees deduction, or any other education tax benefit you are eligible to take. For example, say you have $20,000 in tuition costs and you pay for $15,000 with a distribution from your qualified tuition plan and $5,000 out of pocket. You can use the remaining $5,000 of tuition to claim a tax break.

Choosing Tax Breaks

If the tuition and fees deduction would save you more money on your taxes than excluding all of the earnings from the qualified tuition plan, you can elect to treat some of your distributions as non-qualified withdrawals to claim the tuition and fees deduction or a tax credit, like the American opportunity credit. For example, as of 2012, you can claim the maximum American opportunity credit with only $4,000 of expenses. If you take a $20,000 distribution to pay $20,000 in tuition, you could elect to use $4,000 of that distribution to claim the American opportunity credit and then exclude only the earnings portion of the remaining $16,000 from your income.

Penalty Exception

If you do treat some of your qualified tuition plan distributions as non-qualified so that you can claim a tax deduction or credit, you don't have to pay the tax penalty on that portion of the earnings. For example, say you use $4,000 of your distribution to claim a deduction or credit and $1,000 of that $4,000 represents earnings. Typically, that $1,000 would be hit with a 10 percent non-qualified withdrawal penalty on top of income taxes, but since it's taxable only because you used the expenses to claim a tax break, you avoid the non-qualified withdrawal penalty.

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