Tuition, Education Credits and the 1098T Trap

Great idea, credits and deductions for that huge tuition bill your paying for your kid or for yourself. It is a little confusing what with the Hope Credit becoming the American Opportunity Credit, the Lifetime Learning Credit and the Tuition and Fees Deduction. Which can you take and which can get you the most benefit (ie money). Many other questions abound with these education tax benefits and a trained professional can help you. But on top of these confusing rules, would you believe the educational institution that you are paying all that money to is taking form intended to give you the basic information you need and not bothering to fill it out accurately?

The 1098T, Tuition Statement. Now the concept of what you are able to claim for education expenses, generally speaking, are allowable tuition and fees at an eligible institution minus scholarships, grants and refunded tuition (for classes withdrawn). Not hard for the institution endeavoring to teach you physics and quantum mechanics, right?

Let’s look at the form, which can be found in pdf form at this link:
http://www.irs.gov/pub/irs-pdf/f1098t_11.pdf

OK, box 1 is “Payments received for qualified tuition and related expenses”. Almost none of the colleges choose to use this box, for that would make it too easy. Even those that do are surprising likely to not get it right. Well, if they put an accurate figure in this box, you should be able to simply subtract Box 5 “Scholarships and Grants” (which is the only figure that usually proves accurate) from Box 1 and use that to figure your credits and deductions.

But no, they must, for some reason, use Box 2, “Amounts billed for qualified tuition and related expenses”. This means nothing, literally. Just because you were billed does not mean you paid it. What is completely inexcuseable is when institutions regularly under report this figure. One student at a local private college gave me a 1098T reflected $873 in Box 2 and $4,500 in Box 5 for scholarships. Logging onto her account, we verified that the scholarships were accurate and yet was billed for and paid nearly $15,000 in tuition, including with the scholarships. She had well more than what was needed to claim the full American Opportunity Credit. Wow, 15 grand and you don’t even get an accurate receipt!

One poor gentleman had three kids and a wife going to college. Enough expenses to cause anyone to consider jumping off a bridge. Instead, for some strange reason this gentleman decided instead to do his own taxes using Turbo Tax. Using the “easy question and answer” method, he filled out his forms and got his refund. Great! Except one summer day, he got a letter from the IRS demanding he repay about $11,000. The IRS claimed that there was no proof that the amounts shown in Box 2 had ever been paid.

At that point he decided to come see me. After using “enhanced interrogation techniques” we got everybody’s username and passwords to log on to all of the college accounts involved and after almost 15 pages of account summary pages, we determined that the 1098T’s were more dangerous than good. After thoroughly documenting what he was able to claim, I found that in believing the 1098T’s my client had claimed about $1,700 too much. Much better than $11k but had the forms been accurate my client would never have had to suffer that problem. After a few weeks of angst, the IRS accepted my figures. We were not talking only one institution screwing up the forms, all five of the colleges messed them up (one went to summer classes at another school).

Lessons learned: I know I sound like I am trashing the competition but I recommend using a professional to deal with the credits. Of course, for any professional, garbage in garbage out. We need the forms and information to do a return properly. I suggest you bring in the 1098Ts so that the trained professional can shred them (OK, review them and put them in the file). Also, and most importantly, bring the username, password and website of each college institution. I would describe to you what to look for in the accounts, but the pitfalls in reading these things are many. After you leave your tax professional’s office, you will likely discover your 1098T was inaccurate. You might want to call the financial aid office or drop a note in the envelope with your next check to let them know what you think of the 1098T Trap.