As many of us are gathering our information to file our taxes, an important document should be coming from the educational institution your child is attending. This tax document is called the 1098 –T or Tuition Statement. It is the form that the colleges or educational institutions submit to the federal government and sent to their students that shows the qualified expenses that were paid to the school. Over the past few years, the IRS has placed more importance on accuracy of this document from the colleges.
The problem is the 1098-T is only a guide for the taxpayer and it may not reflect all of a student’s or family’s qualified expenses depending on the tax credits a person is seeking. The other problem is these costs are based on a calendar year and not a school year. The taxpayer should review this tax document and make sure the numbers seem reasonable and reflect their true cost.
Using the IRS Form 1098-T
This document is vital because paying for college has gotten more complex. Along with the financial aid process, there are tax credits and 529 Plans that use this information to determine if a taxpayer qualifies for certain tax advantages.
As an example, if a family qualifies for the American Opportunity Credit, the 1098-T should reflect the tuition and fees that were paid. It will not reflect the book expenses that also can be included to reach the $4,000 of qualified expenses. The American Opportunity Credit is limited to the first four years of the student’s academic career and it is a per student credit.
Another example of a qualified expense that will not appear on the 1098-T is the rent paid for a student living off campus. Room and board are qualified expenses for tax-free withdraws from a 529 Plan. In this case, the 1098-T would not reflect that off campus living expenses but could be used to withdraw the funds. It is important that the family have proper documentation to use the off campus rent as a qualified expense.
With off campus living expenses, you need to contact the college since that qualified expense normally cannot exceed the on campus room and board amount. Many colleges have a separate limit amount for off campus qualified living expenses.
Another common use of the 1098-T is the Lifetime Learning Credit. This credit is a little different than the American Opportunity Credit. It is a per return credit and not a per student credit. This Life Time Learning Credit requires $10,000 of qualified expenses for a family to receive the $2,000 tax credit.
Educational Tax Credit Complexity
As you can see, this process can get complex quickly. Many families will qualify for multiple tax credits and the proper mix and usage of qualified expense is important to maximize their value. According to a recent IRS presentation at the Department of Education FSA Conference, many of these credits are not utilized correctly and money is left on the table.
This is another situation where the college financial aid office cannot provide the complete advice. The financial aid office can only give advice on the financial aid process. In this case, the college financial aid office was involved with developing the amounts on the 1098-T yet, they cannot instruct a family the best ways to utilize these amounts to maximize their tax credits.
The 1098-T is an important document and should be used as a guide in developing a student’s qualified expenses. Additional information and documentation may be required to fully utilize the tax credits available to a student and family. Some planning should be done each year to match up the various qualified expenses with the various education tax credits and advantages. This planning should be done prior to December 31st, each year. Many people send their tax information to their tax advisor after the end of the year, which may limit some of these tax credits.
Attached below is a copy of the IRS Form 1098 -T
Disclaimer: Fred Amrein is not a CPA or tax advisor. All tax decisions should be reviewed by a CPA or tax expert.