When you apply to use your GI Bill benefits, depending on the program you are using, you are eligible to be covered for the cost of tuition, fees, books, and you may be paid a housing stipend based on the amount of BAH (the “basic housing allowance“) for the zip code of the school you mostly attend.
The housing allowance all by itself may be substantial. That money gets paid to the student, rather than the financial institution, and some who receive this benefit may wonder what the tax implications of receiving such benefits might be.
Many military allowances, entitlements, and benefits are tax-free and should not be labeled as income on a tax return. This is true of the GI Bill in its various forms-the Montgomery GI Bill, Post-9/11 GI Bill, and the Forever GI Bill.
However, tax laws may require borrowers who receive the GI Bill to do some extra math on their tax returns based on the amount of the benefit and its use. At this point, it’s important to note that tax laws change frequently, and what applied last year may be different in successive years depending on legislation, tax reform, or other developments.
GI Bill Benefits: Not Taxable, But More Calculations May Be Needed To Claim Certain Tax Breaks
In the 2016 IRS publication, Tax Benefits For Education, we learn the how the GI Bill affects the calculation of tax credits for education. Here is the scenario:
A student who attends college on the GI Bill, with the housing allowance included, which totals, “…a $1,534 monthly basic housing allowance (BAH)…and (2) $3,840 paid directly to your college for tuition.”
The student wants to claim the “American Opportunity” tax credit. AOTC provides up to $2500 of tax breaks to postsecondary students in their first four years of study if they haven’t completed their degree by the end of the tax year.
The IRS advises, “total tuition charges are $5,000. To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses.”
The student is not required to subtract the BAH, “because it was paid to you and its use wasn’t restricted.”
The assistance of a tax professional may be needed to sort out what specific tax incentives you may be eligible for while using the GI Bill this year. What applied last year may be modified in years to come, and what didn’t count in previous years may become important down the line depending on changes to the tax code.
Keep in mind, GI Bill BAH/MHA rates were reduced in 2018 after the Forever GI Bill provisions. You can find more information on these changes and others by reading Forever GI Bill.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News