The American Taxpayer Relief Act of 2012 extended the American Opportunity Tax Credit (AOTC) through December 31, 2017. This tax credit assists with the cost of higher education expenses such as tuition, course materials and other certain eligible fees for four years, which differs from the Hope scholarship credit because the credit may be claimed for four years instead of the two allowed under the Hope credit.
However, starting with the 2016 tax year, student taxpayers must complete and submit Form 1098-T to claim any educational tax benefits for “qualified educational expenses.” This statement, which is sent by schools to students and copied to the IRS, verifies the payment for “qualified educational expenses” in the preceding tax year. Thus, all students must be aware of this new requirements to prove eligibility for education tax breaks in 2016.
Eligible educational institutions file this form for each student they enroll and for whom a reportable transaction is made. Insurers file this form for each individual to whom they made reimbursements or refunds of qualified tuition and related expenses. The 1098-T provides information about educational expenses that may qualify the student, or the student’s parents or guardian if the student is still a dependent, for the tuition-and-fees tax deduction or other education-related tax credits.
Without this official verification, students cannot claim the AOTC or Lifetime Learning Tax Credit (LLTC) for the tuition and fees deduction. This reporting requirement was introduced as a legal requirement after auditing Treasury inspectors found that the IRS allowed billions of dollars in education tax credits for ineligible students in 2011 and 2012. This change will not affect any tax credit claims made on 2015 returns filed in 2016, but will take effect for tax credit claims for the 2016 tax year and its corresponding return to be filed in 2017.
Schools may report a student’s qualified expenses in two ways: one based on how much the student actually paid during the year, the other based on how much the school billed the student during the year. Schools generally must use the same reporting method every year. If it wishes to change its method, IRS approval is required.
Also, the form shows the amount of scholarships and grants that were paid directly to the school for the student’s expenses. Scholarships and grants may reduce the amount of qualified expenses the student can use when calculating a deduction or credit. It also indicates any adjustments the school has made to qualified expenses, scholarships and grants reported on a previous year’s 1098-T. These adjustments may affect the student’s tax liability for the previous year, so the student may have to file an amended return. If students have had expenses reimbursed under a “tuition insurance” policy, they must indicate this amount on the 1098-T. Tuition insurance policies reimburse students after they pay nonrefundable tuition but are later unpredictably forced to withdraw from school for matters like medical or family emergencies.
If you have questions about whether your costs and expenses related to your education are qualified educational expenses and may be legally deducted, or you have any tax-related questions, call THE TAX EXPERTS AT THE Thorgood law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
