University of Illinois Extension

Combining Tax Breaks

Each tax break has rules governing how and if it can be used in combination with other tax breaks. Before committing to using a particular tax break, compare to see if claiming it will limit your ability to claim another tax break that is more beneficial.

The following are general guidelines. For more details, please refer to the appropriate IRS form or publication for the year in which you are claiming the tax break. A list is provided below.

If you are saving for higher education expenses:

  1. You can contribute to both an Education Savings Account and a Qualified Tuition Program. But see Tips, below, for more information.
  2. Distributions from an Educational Savings Account are tax-free if contributed to a Qualified Tuition Program.
  3. Interest on qualifying savings bonds is tax-free if the proceeds are contributed to either an Education Savings Account or a Qualified Tuition Program.

If you are paying for higher education expenses:

  1. You cannot claim the American Opportunity (Hope) Scholarship and the Lifetime Learning Credit for the same student. You can claim both credits if the expenses are for different students.
  2. Expenses paid with following types of tax-free educational assistance cannot be used to claim any deduction or credit listed under numbers 3 or 4, below:
    1. The tax-free portion of scholarships and fellowships
    2. Veteran’s education benefits
    3. Pell grants 1
    4. Employer-Provided Assistance
    5. “Any other non-taxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.” (IRS Publication 970)
  3. After subtracting any expenses covered by the types of tax-free educational assistance listed above, apply the remaining expenses to the following tax breaks in the order shown. The same expenses cannot be used to claim more than one of these benefits:
    1. American Opportunity (Hope) or Lifetime Learning Credits.
    2. Distributions from Education Savings Accounts and Qualified Tuition Programs. If you take distributions from both, you must allocate expenses between the two.
    3. Savings bond interest deduction.
  4. Calculate qualified expenses for additional tax breaks as follows. First, subtract expenses covered by tax-free educational assistance listed under number 2, above. Then:
    1. Student loan interest deduction: Subtract 1) non-taxable earnings from Education Savings Accounts, 2) non-taxable earnings from Qualified Tuition Programs, and 3) the savings bond interest deduction.
    2. Penalty-free early distributions from IRAs: Subtract distributions from Education Savings Accounts

  1. Pell grants are not listed by the IRS as an adjustment for the student loan interest deduction or for the savings bond interest deduction.