Taxable Distributions From Qualified Tuition Programs: Education Tax Benefits (2025 IRS Guide)

This guide covers “Taxable Distributions From Qualified Tuition Programs” within education tax benefits. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 970 (2025), Tax Benefits for Education, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

The part of a distribution representing the amount paid or contributed to a QTP doesn’t have to be included in income. This is a return of the investment in the plan.

The recipient of the distribution generally doesn’t have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to AQEE (defined under Figuring the Taxable Portion of a Distribution, below). The designated beneficiary is considered the recipient only if the distribution is made (a) directly to the designated beneficiary, or (b) to an eligible educational institution for the benefit of the designated beneficiary. Otherwise, the account owner is considered the recipient of the distribution.

Taxable Distributions From Qualified Tuition Programs

To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the AQEE.

Adjusted qualified education expenses (AQEE).

This amount is the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes:

• The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• Veterans’ educational assistance (see Veterans’ Benefits in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1);

• Employer-provided educational assistance (see chapter 10); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Taxable earnings.

Use the following steps to figure the taxable part.

1. Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. The numerator (top part) is the AQEE paid during the year, and the denominator (bottom part) is the total amount distributed during the year.

2. Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income. Report it on Schedule 1 (Form 1040), line 8z.

Example 1.

In 2016, a young student’s parents opened a savings account for them with a QTP maintained by their state government. Over the years, the parents contributed $18,000 to the account. The total balance in the account was $27,000 on the date the distribution was made. In the summer of 2025, the student enrolled in college and had $8,300 of qualified education expenses for the rest of the year. The college expenses were paid from the following sources.

Before the student can determine the taxable part of their QTP distribution, they must reduce their total qualified education expenses by any tax-free educational assistance.

Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable.

The student’s Form 1099-Q shows that $950 of the QTP distribution is earnings. They figure the taxable part of the distributed earnings as follows.

They must include $18 in income (Schedule 1 (Form 1040), line 8z) as distributed QTP earnings not used for AQEE.

Coordination With American Opportunity and Lifetime Learning Credits

An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren’t used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, the beneficiary must further reduce them by the expenses taken into account in determining the credit.

Example 2.

Assume the same facts as in Example 1, except that the parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses).

The taxable part of the distribution is figured as follows. The student must include $735 in income (Schedule 1 (Form 1040), line 8z). This represents distributed earnings not used for AQEE.

Coordination With Coverdell ESA Distributions

If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary’s AQEE, the expenses must be allocated between the distributions.

Example 3.

Assume the same facts as in Example 2, except that instead of receiving a $5,300 distribution from their QTP, the student received $4,600 from that account and $700 from their Coverdell ESA. In this case, the student must allocate their $1,200 of AQEE between the two distributions.

The student then figures the taxable portion of their Coverdell ESA distribution based on qualified education expenses of $158, and the taxable portion of their QTP distribution based on the other $1,042.

Note.

If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 6 under Coordination With Qualified Tuition Program (QTP) Distributions.

Losses on QTP Investments

For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a QTP account, you can’t claim the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account.

.The aggregation rules that applied if you had distributions from more than one QTP account during a year were eliminated for distributions after 2014. For more information, see Notice 2016-13, available at IRS.gov/IRB/2016-07_IRB#NOT-2016-13..

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 970 (2025), Tax Benefits for Education: Qualified Tuition Program (QTP) — Are Distributions Taxable? — Figuring the Taxable Portion of a Distribution — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.