Tuition tax 'double dip' may be legal

03/03/2008

QUESTION:
Dear Joe,

I am taking job-related courses but my employer does not have a tuition reimbursement plan. I know I can use a 529 plan to pay my tuition. My state allows a tax deduction for 529 contributions but there is no federal deduction for 529 contributions.

Can I itemize my tuition as a job-related expense on my federal return -- even if the tuition was paid using a 529 plan -- since there was no federal tax benefit except on earnings from the 529 plan?

-- Cris

ANSWER:
Dear Cris,

As a general rule, the tax law prohibits the use of the same dollar of expenditure for more than one tax benefit, affectionately known as "double dipping." For example, if you were to claim the Lifetime Learning credit against your tuition payments, those tuition payments could no longer be counted as qualified expenses when it comes to using your 529 plan.

Itemizing your tuition as a job-related expense, while including the tuition for 529 purposes, is a clear example of double dipping. However, I scoured the tax code and found no specific rule preventing your use of both tax benefits for the same tuition payments.

Perhaps this was an oversight on the part of Congress, considering that tax law specifically prohibits the same double dip when using a Coverdell education savings account, or CESA. CESAs and 529s are subject to similar tax rules when used to pay for college, but apparently that is not the case with respect to your particular issue.

The IRS explains the various tax incentives for education in Publication 970: Tax Benefits for Education. A section describing the business deduction for work-related education, including a brief explanation of the anti-double dipping rule, starts on Page 59 of that publication.

Unfortunately, the IRS does not provide enough details to clarify the coordination, or lack thereof, between the business deduction and 529 withdrawals. Ultimately, that's left for you and a tax professional to determine.

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