Navigating Qualified Tuition and Related Expenses Payments for Tax Benefits

Understanding qualified tuition and related expenses is crucial for students and their families seeking to maximize education tax credits and deductions. This article provides a comprehensive overview of these expenses, how they are reported, and how they relate to various tax benefits.

Understanding Form 1098-T: Tuition Statement

Form 1098-T, officially titled "Tuition Statement," is an informational tax document prepared by eligible educational institutions, such as colleges and universities, to report payments of qualified tuition and related expenses (QTRE), as well as scholarships and grants disbursed during the calendar year. Tuition-paying students at eligible colleges or other post-secondary institutions should receive a copy of Internal Revenue Service Form 1098-T from their school each year. Eligible institutions include most colleges, universities, and vocational schools that are eligible to participate in the Department of Education’s student aid programs. Schools are required to send Form 1098-T to any student who paid "qualified educational expenses" in the preceding tax year. If someone else pays such expenses on behalf of the student (like a parent), the student still gets "credit" for them and receives the 1098-T. This form is essential for claiming education tax credits, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

Accessing Your 1098-T:

Many institutions, like MIT, offer online access to Form 1098-T through student portals. For example, MIT partners with Heartland ECSI to provide students a self-service option to access their 1098-T forms.

Key Boxes on Form 1098-T:

Box 1: Reports amounts paid for qualified tuition and related expenses during the calendar year. Box 1 reports qualified tuition and related expenses (QTRE) charged and paid within the calendar year, running January 1 to December 31. If the school reports the amount paid, it puts that figure in Box 1 of the form. A school generally has to use the same reporting method every year. If it changes its method-which requires IRS approval-it puts a check mark in Box 3.
Box 4: Shows any adjustments the school has made to qualified expenses reported on a previous year's 1098-T. Box 4 of Form 1098-T reports adjustments made to qualified tuition and related expenses reported on a prior year Form 1098-T in Box 1. The amount reported in Box 4 represents a reduction in tuition paid during a prior calendar year. For example, if you paid Spring semester classes in December and withdrew from classes in January which resulted in a refund, Box 4 reports the decrease in paid tuition due to the withdrawal. The amount reported in Box 4 for adjustments to qualified tuition and related expenses may reduce any allowable education credit you may claim for the prior year.
Box 5: Shows the amount of scholarships and grants that were paid directly to the school for the student's expenses. Box 5 of Form 1098-T reports the total of scholarships or grants administered and processed by the ASU Financial Aid and Scholarship Services (FASS) during the calendar year.
Box 6: Shows any adjustments the school has made to scholarships and grants reported on a previous year's 1098-T. Box 6 of Form 1098-T reports adjustments made to scholarships or grants reported on a prior year Form 1098-T in Box 5. The amount reported in Box 6 represents a reduction in scholarships or grants reported for a prior calendar year. The amount reported in Box 6 for adjustments to scholarships or grants may affect the amount of any allowable tuition and fees deduction or education credit you may claim for the prior year.
Box 7: Indicates, if checked, that Box 1 includes amounts for an academic period beginning in the next calendar year.
Box 8: Shows whether you are considered to be carrying at least one-half the normal full-time workload for your course of study at ASU for at least one academic period during the calendar year. If this box is marked, you meet one of the requirements for the Hope tax credit.
Box 9: Shows whether you are considered to be enrolled in a program leading to a graduate degree, graduate-level certificate, or other recognized graduate-level educational credential.
Box 10: of the form comes into play only in cases in which students have had expenses reimbursed under a "tuition insurance" policy.

Important Considerations Regarding Form 1098-T:

You are not required to attach IRS Form 1098-T to your tax return. The IRS Form 1098-T is not like the IRS Form W-2 obtained from your employer, which is required to be attached to the tax return filed with the IRS.
The single most important information on the form is your Social Security Number. Your Social Security Number must be correct. The Social Security Number and address on Form 1098-T were obtained from information provided to ASU, although the address shown on Form 1098-T is irrelevant for IRS income tax filing purposes.
Form 1098-T is not meant to be an indicator of income. Form 1098-T does not indicate whether you received a taxable scholarship or fellowship. It is the sole responsibility of the student to report and pay taxes on the taxable portion of any scholarship, fellowship, or grant that is received. For example, you may need to report taxable income if the total amount of your grants or scholarships received during the year exceeded the amount you paid for qualified education expenses in that year.

Defining Qualified Tuition and Related Expenses (QTRE)

Qualified tuition and related expenses includes tuition and student life fees. Qualified education expenses are tuition, fees and other related expenses paid for an eligible student to enroll or attend an eligible educational institution. Eligible expenses also include the payment of student activity fees required to enroll or attend the school.

IRS Definition:

The term “qualified tuition and related expenses” means tuition and fees required for the enrollment or attendance of- (i) the taxpayer, (ii) the taxpayer’s spouse, or (iii) any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151, at an eligible educational institution for courses of instruction of such individual at such institution.

Eligible Institutions:

Eligible institutions include most colleges, universities, and vocational schools that are eligible to participate in the Department of Education’s student aid programs.

What Expenses Are Included?

Tuition: The cost of courses.
Fees: Fees required for enrollment or attendance, including student activity fees.
Course Materials (for AOTC): For the American Opportunity Credit: Expenses paid for books, supplies, and equipment the student needs for a course of study are considered qualified education expenses, even if it is not paid to the school.
Books, supplies and equipment: Unlike other education tax credits, AOTC is allowed for expenses for course-related books, supplies and equipment that aren’t necessarily paid to the educational institution but are needed for attendance. For AOTC but not LLC, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study. You don’t have to buy materials from the eligible educational institution.

What Expenses Are Excluded?

Sports, Games, or Hobbies: Expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual’s degree program.
Non-Academic Fees: Student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual’s academic course of instruction.
In general, insurance, medical expenses, transportation, and living expenses are not qualified school expenses for an education credit.

Education Tax Credits: AOTC and LLC

Education credits help with the cost of higher education. They can reduce the amount of tax owed on your tax return or they may increase your refund. You can claim only one of the credits per qualifying student. You can claim both the AOTC and LLC on the same return only if they are not for the same student and the same expenses. Although key education expenses like tuition and fees are no longer tax deductible, you might be able to claim a credit by using the American Opportunity Credit or the Lifetime Learning Credit.

American Opportunity Tax Credit (AOTC):

The American opportunity tax credit is a credit for qualified education expenses, paid for an eligible student, for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. It’s a tax credit of up to $2,500 of the cost of tuition, certain required fees and course materials needed for attendance and paid during the tax year.

Eligibility: The AOTC is available ONLY if the student hasn’t completed the first 4 years of postsecondary education. AOTC is allowed for expenses for course-related books, supplies and equipment that aren’t necessarily paid to the educational institution but are needed for attendance.
Credit Amount: You can get a maximum annual credit of $2,500 per eligible student.
Income Limits: Yes. To claim the full credit, your modified adjusted gross income (MAGI; see Q&A 13) must be $80,000 or less ($160,000 or less for married taxpayers filing jointly). If your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married taxpayers filing jointly), the amount of your credit is reduced.
How to Claim: To claim AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). To claim AOTC, complete Form 8863 and submit it with your Form 1040 or 1040-SR. Enter the nonrefundable part of the credit on Schedule 3 (Form 1040 or 1040-SR), Line 3.

Lifetime Learning Credit (LLC):

Eligibility: Included with qualified tuition and fees, you can count costs for course-related books, supplies, and equipment (including computers) required to be paid to the educational institution.
How to Claim: To claim LLC, complete Form 8863 and submit it with your Form 1040 or 1040-SR.

Key Differences Between AOTC and LLC:

AOTC: Unlike other education tax credits, AOTC is allowed for expenses for course-related books, supplies and equipment that aren’t necessarily paid to the educational institution but are needed for attendance.
LLC: Included with qualified tuition and fees, you can count costs for course-related books, supplies, and equipment (including computers) required to be paid to the educational institution.

Claiming the Credit:

To claim AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).

Other Education-Related Tax Benefits

Student Loan Interest Deduction:

Student loan interest, a college expense that generally applies in an after-college scenario, is still tax deductible. This college expense tax deduction lets you reduce your taxable income by up to $2,500 for qualified student interest paid during the year. In this case, qualified means the loan was only for education expenses, not for other types of expenses. The requirements state that the student must be the taxpayer, spouse, or dependent. The student must have been enrolled at least half-time at an eligible institution, and the program must lead to a degree, certificate, or other recognized credential. Furthermore, the loan cannot be from a related person or a qualified employer plan. If you paid $600 or more of interest on a qualified student loan during the calendar year, you should receive a Form 1098-E, Student Loan Interest Statement from each loan servicer.

Tuition and Fees Deduction (Expired):

Qualified tuition and fees are no longer tax deductible after 2020.

Important Considerations and Potential Issues

Form 1098-T Discrepancies:

The amount on Form 1098-T might be different from the amount you actually paid and are deemed to have paid. The form may not reflect the total or accurate amount of qualified education expenses you can claim. For information on what amount to claim, see qualified education expenses in Tax Benefits for Education, Pub. 970. Check the form to make sure it’s correct.

What to Do If You Didn't Receive Form 1098-T:

If you didn’t receive Form 1098-T, you may still be eligible to claim a credit. Make sure you’re qualified before claiming the credit and avoid common education credit errors.

IRS Inquiries:

If you received a letter from the IRS questioning your AOTC claim. What should I do? If you received a Form 1098-T, review it to make sure the student’s name and Social Security number are correct. If you claimed expenses that weren’t reported on Form 1098-T, Box 1 as amounts paid, send us copies of receipts, cancelled checks or other documents as proof of payment. If you don't have a letter, see Forms 886-H-AOC and 886-H-AOC-MAX for examples. Form 886-H-AOC is also available in Spanish.

Incorrectly Prepared Returns:

You’re legally responsible for what’s on your return, even if someone else prepares it. We urge you to choose a tax preparer wisely.

Read also: Revolutionizing Payments

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