The IRS Stands Firm on the    Meaning of "Required"

IRS Definitions     Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.     Eligible educational institution.  This is any college, university, vocational school, or other post-secondary educational institution eligible to participate in the student aid programs administered by the Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions. The educational institution should be able to tell you if it is an eligible educational institution. — IRS Publication 590, Individual Retirement Arrangements

"Neither the Internal Revenue Code nor the applicable regulations provide specific guidance on whether a computer is a qualified higher education expense." — U.S. Tax Court

The exception for higher education costs covers more than just tuition for yourself, your spouse, child or grandchild. It can also apply to room and board, books, supplies, equipment and related fees. But there are limits. In one case, the Tax Court drew the line at certain other expenses.

Facts of the Case

James Gorski withdrew $25,000 from his IRA and added the amount to his income on his next tax return, which he filed jointly with his wife, Mary. However, the couple did not pay the 10 percent penalty on the distribution. They were both under age 59 1/2 at the time of the withdrawal.

The Gorskis claimed that part of the money was used to pay qualified higher education expenses for their daughter, Kathleen, who attended college in Ohio.

The expenses paid during the tax year in question amounted to more than $9,700, and included tuition, room and board, fees, books, equipment, housewares, furniture and $1,585 for a personal computer.

The IRS assessed the 10 percent penalty on the portion of the IRA distribution that was not used for qualified expenses.

The Gorskis argued the computer was necessary for their daughter's education. Although the university's library provided a bank of computers, the taxpayers stated that there were not enough available for 15,000 students. They were also concerned about their daughter's safety walking back from the library late at night.

The Tax Court disagreed. It noted that the Gorskis' daughter was not enrolled in courses that specifically required her to have a personal computer. In fact, the university made syllabi and course assignments accessible to students who did not have their own PCs. In short, there was no documentation from the university stating that a computer was necessary for the daughter's particular course of study.

Some other expenses were disallowed for the same reason. Although housewares, appliances, furniture and bedding were provided for the daughter while at college, they were not required. Result: The Gorskis had to pay the 10 penalty on the amount spent for the PC, as well as expenditures that did not meet the standards of the tax code. (James M. and Mary N. Gorski, TC Summ. Op. 2005-112)

Footnote: The Tax Court interpreted the early withdrawal exception very narrowly in this instance, adhering closely to the language of the law, which states an expense must be "required." (IRC Section 72 (t)2(E)) If you want to take advantage of the early IRA withdrawal exception for school-related equipment, obtain documentation from the institution that the items are required.