Understanding Form 1098-T: Tuition Statement and Scholarship Reporting
The IRS Tax Form 1098-T, also known as the Tuition Statement, is an informational document that colleges and universities in the United States are required to issue to students and file with the Internal Revenue Service (IRS). This form is crucial for students and their families to determine eligibility for certain education tax credits, such as the American Opportunity Credit and the Lifetime Learning Credit. While the 1098-T form provides key information, it's essential to remember that it is just an informational form and doesn't directly define taxable income or eligibility for a tax credit. Understanding the intricacies of this form can significantly aid in tax preparation and financial planning related to education expenses.
Who Needs to File and Receive Form 1098-T?
Eligible Educational Institutions
An eligible educational institution, such as a college, university, vocational school, or other postsecondary educational institution, must file Form 1098-T for each student enrolled for any academic period during the year for whom a reportable transaction is made. This includes institutions described in section 481 of the Higher Education Act of 1965, as in effect on August 5, 1997, and eligible to participate in the Department of Education’s student aid programs. This requirement extends to governmental units or agencies or instrumentalities of governmental units that qualify as eligible educational institutions.
If another person receives or collects payments of qualified tuition and related expenses on behalf of the educational institution, that other person is responsible for filing Form 1098-T. However, if that person does not possess the necessary information to comply with the reporting requirements, the educational institution must fulfill the reporting requirements.
Insurers engaged in the business of making refunds or reimbursements of qualified tuition and related expenses are also required to file Form 1098-T.
Students
Schools are mandated to make Form 1098-T available to any student who paid "qualified educational expenses" in the previous tax year. These expenses include tuition, any fees required for enrollment, and course materials the student was required to purchase from the school. Even if someone else, such as a parent, pays these expenses on behalf of the student, the student can still be eligible for credit if they are not claimed as a dependent. However, the credit can only be claimed once, either by the parent (if claiming the student as a dependent) or by the student (if not claimed as a dependent), but not by both.
Read also: Form 1098-T Explained
Schools must send or make the form available to the student by January 31 and file a copy with the IRS by February 28.
Key Boxes on Form 1098-T: What They Mean
Form 1098-T contains several boxes, each providing specific information relevant to calculating education tax credits and determining taxable income. Here's a breakdown of the key boxes:
Box 1: Payments Received for Qualified Tuition and Related Expenses
This box displays the total amount of payments received for qualified tuition and related expenses from all sources during the calendar year. The amount reported is the total amount of payments received less any reimbursements or refunds made during the same calendar year that relate to the payments received for qualified tuition and related expenses. It's important to note that the amount reported is not reduced by scholarships and grants reported in box 5.
Box 2: Amount of Qualified Tuition and Related Expenses Billed (No longer used)
Prior to 2018, this box showed the amount of qualified tuition and related expenses billed to the student during the calendar year. However, beginning in tax year 2018, schools report a student's qualified expenses based on how much the student paid during the year, making Box 1 more relevant.
Box 4: Adjustments Made for a Prior Year
This box shows any adjustments the school has made to qualified expenses reported on a previous year's 1098-T. If a previous year's expenses were lower than initially reported, the student may be responsible for additional tax and may need to recapture (repay) any excess credit received.
Read also: 1098 Tax Form Guide
Box 5: Scholarships or Grants
This box indicates the total amount of any scholarships or grants that the educational institution administered and processed during the calendar year for the payment of the student’s costs of attendance. Scholarships and grants generally include all payments received from third parties, excluding family members and loan proceeds. This includes payments received from governmental and private entities such as the Department of Veterans Affairs, the Department of Defense, civic and religious organizations, and nonprofit entities. A scholarship or grant is considered administered and processed by the institution if the institution receives payment of an amount, whether by check, cash, electronic transfer, or other means, and such payment is designated as a grant or a scholarship by the payor, or the circumstances make it clear that the payment is a grant or scholarship.
Box 6: Adjustments to Scholarships or Grants for a Prior Year
Box 6 shows any adjustments the school has made to scholarships and grants reported on a previous year's 1098-T.
Box 7: Expenses for an Academic Period Beginning in the Next Year
Schools must check Box 7 if the amount in Box 1 or 2 includes expenses for an academic term that begins in the first three months of the year following the year covered by the 1098-T.
Box 8: Half-Time Student
A check mark in Box 8 indicates that the student was enrolled at least half-time during any academic period that began in the tax year. A half-time student is defined as a student enrolled for at least half the full-time academic workload for the course of study the student is pursuing. The institution's standard for a half-time student workload must equal or exceed the standards established by the Department of Education under the Higher Education Act and set forth in 34 C.F.R.
Box 9: Graduate Student
Check this box if the student was a graduate student.
Read also: 1098-T Form Explained
Tax Implications of Scholarships and Grants
Scholarships and fellowships may be taxable or tax-exempt. A qualified scholarship is tax-exempt, while a nonqualified scholarship is taxable.
Qualified Scholarship
A qualified scholarship is money that is applied toward tuition expenses, required enrollment fees, books, and supplies that are required as part of the normal coursework for a semester.
Nonqualified Scholarship
A nonqualified scholarship is money received that exceeds qualified expenses, such as room, board, and living expenses. If an award covers both tuition and room and board, the amount used for tuition is tax-free, while the amount used for room and board is taxable.
If any part of a scholarship or fellowship grant is taxable, the recipient may have to make estimated tax payments on the additional income. If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on Line 1a of the tax return.
How to Determine Taxable Income from Scholarships
The amount that you are eligible to use to reduce your tax bill is, in most cases, simply the amounts paid for tuition and fees minus the amount of scholarships you received.
If the amount in Box 5 (scholarships) is GREATER THAN the amount in Box 1 (or Box 2, whichever is filled in on your 1098-T), then you cannot use any expenses to reduce your tax bill. If the amount in Box 5 is LESS THAN the amount in Box 1 (or Box 2, whichever is filled in on your 1098-T), then you can use the expenses as a deduction or credit. Subtract Box 5 from Box 1 (or Box 2). The difference is generally the amount that was paid out of pocket and that can be reported on your return.
For instance, consider a student who has $25,868 in box 5 of the 1098-T and $16,893 in box 1. At first glance, it might appear that the student has $8,975 of taxable income, and nobody can claim the American Opportunity Credit (AOC). However, books and computers are also qualifying expenses for the AOC.
Common Scenarios and Workarounds
Scholarship Exceeds Tuition and Fees
If a student's scholarship exceeds the amount of tuition and fees, the excess amount may be considered taxable income. In such cases, it's crucial to accurately report the taxable portion of the scholarship on the tax return.
For example, if a student has $25,868 in Box 5 (scholarships) and $16,893 in Box 1 (tuition and fees), the difference of $8,975 might be considered taxable income. However, the student may be able to reduce this taxable amount by including expenses for books and computers.
Utilizing the American Opportunity Credit (AOC)
The American Opportunity Credit (AOC) is a tax credit for qualified education expenses paid for the first four years of higher education. To claim the AOC, students (or their parents, if the student is a dependent) must meet certain eligibility requirements, including being enrolled at least half-time and pursuing a degree or other credential.
If a student's scholarships and grants exceed their tuition and fees, they may not be able to claim the full AOC. However, they may still be able to claim a portion of the credit by including expenses for books and computers.
Workarounds in Tax Software
In some cases, tax software may not accurately calculate the AOC or the taxable portion of scholarships. In such cases, it may be necessary to use workarounds to ensure that the tax return is accurate.
For example, one workaround is to enter only $4,000 in Box 1 of the 1098-T on the return to get the tax software to check the proper box on Form 8863 (Education Credits). Then, enter the 1098-T exactly as received on the student's return and enter book and computer expenses separately.
Another workaround is to manually calculate the taxable amount of the scholarship and enter the 1098-T on the return with $0 in Box 1 and the taxable amount in Box 5.
Important Considerations for Educational Institutions
Electronic Filing Requirements
The Taxpayer First Act of 2019 authorized the Department of the Treasury and the IRS to issue regulations that reduce the 250-return e-file threshold. T.D. 9972, published February 23, 2023, lowered the e-file threshold to 10 (calculated by aggregating all information returns), effective for information returns required to be filed on or after January 1, 2024. The IRS has developed IRIS, an online portal that allows taxpayers to e-file information returns after December 31, 2022, for 2022 and later tax years.
Statement Furnishing Requirements
If required to file Form 1098-T, educational institutions must furnish a statement or acceptable substitute, on paper or electronically, to the student. To ease statement furnishing requirements, Copy B of Forms 1098-E and 1098-T are fillable online in a PDF format, available at IRS.gov/Form1098E or IRS.gov/Form1098T.
The global consent process must meet all the consent, disclosure, format, notice, and access period requirements for electronic furnishing of Forms 1098-T as required by paragraphs (a)(2) through (6) of Regulations section 1.6050S-2.
Student Taxpayer Identification Number (TIN)
Enter the student’s TIN, as provided on Form W-9S, Request for Student’s or Borrower’s Taxpayer Identification Number and Certification, or other form. If the student’s TIN was solicited in writing (Form W-9S or other form) for the current year, check the box. Also check the box if the student’s TIN was obtained in a prior year by making a solicitation in writing (Form W-9S or other form) or if the student’s TIN was obtained in a prior year from his or her financial aid application or other form and in either case have no reason to believe the TIN previously obtained is incorrect.
Check the box if the institution is filing the Form 1098-T with nothing in the field for the student’s TIN because the institution has no record of a TIN, but only if a written solicitation for the TIN was made on or before December 31 of the year for which the Form 1098-T is being filed. By checking the box and filing Form 1098-T with the IRS (for electronic filers), the institution certifies under penalties of perjury that it has in good faith complied with the standards in Regulations section 1.6050S-1 governing the time and manner of soliciting the TIN of the student. Filers who transmit paper forms to the IRS will make such certification by signing Form 1096 in conjunction with filing the returns with the boxes checked in the fields designated for the student’s TIN.
Truncating Student TIN on Payee Statements
Pursuant to Regulations section 301.6109-4, all filers of Form 1098-T may truncate a student’s TIN (social security number (SSN), individual taxpayer identification number (ITIN), adoption taxpayer identification number (ATIN), or employer identification number (EIN)) on payee statements. Truncation is not allowed on any documents the filer files with the IRS. A filer’s TIN may not be truncated on any form.
Contact Information
Institutions must provide their name, address, and telephone number on Form 1098-T. In addition, they may include information on a third-party service provider who filed the form or who may answer questions about the statement. Institutions must provide the telephone number for the information contact at the institution. Generally, this is an administrative office or department. The institution’s general telephone number should not be provided.
Seeking Professional Tax Advice
Given the complexities surrounding Form 1098-T and education tax credits, it is always advisable to seek guidance from a qualified tax professional. They can provide personalized advice based on individual circumstances and ensure accurate tax reporting.
Educational institutions are generally not allowed to discuss tax implications, how this form may relate to an individual, or give tax advice. Please consult a tax preparer with all questions related to this document.
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