One of the best financial rewards for attending college is the tax break the IRS provides for students attending qualified educational institutions.
Unfortunately many families may overlook these programs because important tax information is sent to the student and not the parent who claims them as a dependent on their tax return.
This is a common oversight that can be avoided when you understand what to do when you receive form Form1098-T: Tuition Payments Statement. It is the information return that colleges and universities are required to issue for a student’s eligibility for the American Opportunity and Lifetime Learning credits. These and other education credits are explained in The IRS Publication 970, Tax Benefits for Education available on line at www.irs.gov.
Most accredited public, nonprofit, and private postsecondary institutions such as colleges, universities, vocational schools or other post secondary educational institutions must file Form 1098-T for qualified tuition and related expenses. Expenses can either be reported as the amount received or the amount billed for qualified tuition and related educational expenses from any source during the calendar year.
The 1098-T is either mailed or electronically sent to each student as well as the IRS. Unlike a W-2, this is an informational return that reports qualified expenses and other information for determining whether the taxpayer qualifies for these credits and does not have to be submitted with the taxpayer’s federal income tax return.
Students should be sensitive to the importance of form 1098-T as much as they are for receiving their W-2. They should contact their financial aid office to get a duplicate copy if they have not received one by January 31.
Delivery problems can occur if the student’s address or e-mail accounts are inaccurate.
Form 1098-T reports qualified expenses regardless of whether they were paid for in cash, loans etc. In other words, this is what the student was charged for the qualified education expenses. Explanations of these other information are on the back of this form.
You may ask, if this is so simple how can there be any problems?
Although the rules are well explained, beware of the following trouble spots.
The parents that claim the credit for himself or herself, a spouse or the student they claim as their dependent and take tax exemption can claim the tax credit even if the student did not contribute to their education.
A student can claim the tax credit if they take the tax exemption and are not taken as a dependent on their parents tax return.
Families should determine the economic tax advantages consult with a tax professional when determining who should take the tax exemption.
Parents cannot take the credit if their filing status is married filing separately.
Taxpayers can file amended tax returns to recapture these credits per IRS regulations that applied to the years that they could have been taken.
The American Opportunity Credit allows up to a $2,500 tax credit per eligible student to reduce the amount of income tax paid. This credit reduces taxes unlike a deduction that reduces the amount of income subject to this tax. The tax credit is available for only four tax years per eligible student pursuing an undergraduate degree or other recognized educational credential. The student must be enrolled at least halftime for at least one academic period that begins during the tax year. Qualified expenses are tuition and fees required for enrollment. Course related books, supplies and equipment do not need to be purchased from the institution to qualify. There can be no felony or drug convictions on a student’s record. This deduction is subject to income limits described in Publication 970.
The Lifetime Learning Credit allows up to a $2,500 tax credit per tax return to reduce the amount of income tax paid. The tax credit is available for an unlimited number of years. The student does not need to be pursuing a degree or other recognized education credential and may take one or more courses. Course related books; supplies and equipment paid to the institution qualify. Students with felony drug convictions are eligible. This deduction is subject to income limits described in Publication 970.
Although students may not be involved in preparing tax returns, they should be on the lookout for form 1098-T and tell you if and when it is received.
The process of determining eligibility for either program is relatively painless. There are also many other educational credits deductions for loans, tuition and fees, etc. described in IRS publication 970 for which you may qualify.
Enjoy your refund!