Education Credits

[Burke]

TP graduated in May 2012. Parents made a payment to school in advance (12/13/11) because they were billed for Spring 2012 semester on 11/23/11. Other than using a loan taken on 1/14/12, is there any way TP can take a tuition credit on 2012 return for the tuition expense? Scholarships and grants credited in Jan 2012 exceed tuition billed.

[Kram BergGold]

Improper plannnig

You can only count tution paid in 2013 on the 2013 return.

[mactoolsix]

Pub 970 - Prepaid expenses.
Qualified education expenses paid in 2011 for an academic period that begins in the first three months of 2012 can be used in figuring and education credit for 2011 only. See Academic period, earlier. For example, if you pay $2,000 in December 2011, for qualified tuition for the 2012 winter quarter that begins in January 2011, you can use that $2,000 in figuring an education credit for 2011 only (if you meet all the other requirements).

They should have taken this credit on the 2011 return - worth amending, or had they max'd out the 2011 credits?

Mike

[Gary2]

TP graduated in May 2012. Parents made a payment to school in advance (12/13/11) because they were billed for Spring 2012 semester on 11/23/11. Other than using a loan taken on 1/14/12, is there any way TP can take a tuition credit on 2012 return for the tuition expense? Scholarships and grants credited in Jan 2012 exceed tuition billed.

It seems like there are really two issues: getting the maximum allowed credit and avoiding taxation on the scholarships/grants.

Tell us more about how the loan proceeds were used. Also, were there any other eligible expenses (books, supplies) paid in 2012?

What happened to the excess scholarship/grant amount? Was it used to pay other bills, or refunded to the student? Were the amounts limited by the terms of the scholarship/grant to tuition?

[FEDUKE404]

Year of payment rules, and scholarship must be considered

TP graduated in May 2012. Parents made a payment to school in advance (12/13/11) because they were billed for Spring 2012 semester on 11/23/11. Other than using a loan taken on 1/14/12, is there any way TP can take a tuition credit on 2012 return for the tuition expense? Scholarships and grants credited in Jan 2012 exceed tuition billed.

First, the simple answer: If you make qualifying education payments in calendar year X, you cannot use those payments for calendar year Y education credits.

Second....the rest of the story: Even IF you otherwise could claim a credit for the 12/13/2011 payment to the school, that credit may well be reduced/negated by the amount of scholarships/grants later awarded. ( "You can't have your cake and eat it, too." ) A similar scenario will also exist for whatever expenses were "paid" with the loan taken on 01/14/2012.

BOTTOM LINE: You could quite easily have a scenario where you cannot claim any education credits for either 2011 or 2012. And, of course, you always run the risk of having some taxable income as a result of the scholarship amount received versus qualifying expenses (which are not necessarily only tuition). In walks the infamous Form 1098-T.

FE

[Burke]

It seems like there are really two issues: getting the maximum allowed credit and avoiding taxation on the scholarships/grants.

Tell us more about how the loan proceeds were used. Also, were there any other eligible expenses (books, supplies) paid in 2012?

What happened to the excess scholarship/grant amount? Was it used to pay other bills, or refunded to the student? Were the amounts limited by the terms of the scholarship/grant to tuition?

The scholarships and grants did not exceed the tuition billed. However, the scholarship/grant amts were all claimed as income on the TP's 2012 return because she did it herself on TT and the college reported them for 2012. There was nothing shown as billed on the 1098T for 2012 because they billed for it in 2011. None of them ever show anything in the paid box. So we got transcripts. Spring 2012 tuition was billed in 2011; parents paid the amount not covered by scholarships and loan on 12/13/11. Loan proceeds received in 2012 were used against tuition. So it appears that the only thing we can do is amend to reduce the taxable scholarship amt originally reported using the unsubsidized loan amt credited in 2012. There was more than enough paid earlier in 2011 without the Dec payment to take the max 2011 AOC credit. Just unfortunate that they paid the 2012 early. This school was giving a discount for early payment; so its costing the TP way more than that losing the credit against the income she has to report.

[FEDUKE404]

Pair expenses with payments+scholarship

The scholarships and grants did not exceed the tuition billed. However, the scholarship/grant amts were all claimed as income on the TP's 2012 return because she did it herself on TT and the college reported them for 2012. There was nothing shown as billed on the 1098T for 2012 because they billed for it in 2011. None of them ever show anything in the paid box. So we got transcripts. Spring 2012 tuition was billed in 2011; parents paid the amount not covered by scholarships and loan on 12/13/11. Loan proceeds received in 2012 were used against tuition. So it appears that the only thing we can do is amend to reduce the taxable scholarship amt originally reported using the unsubsidized loan amt credited in 2012. There was more than enough paid earlier in 2011 without the Dec payment to take the max 2011 AOC credit. Just unfortunate that they paid the 2012 early. This school was giving a discount for early payment; so its costing the TP way more than that losing the credit against the income she has to report.

If the facts are as you stated, your "only thing" comment is incorrect.

You can amend the 2011 tax return to claim (correct??) any allowable education tax credits. The amount to be used would be the 2011 qualifying education expenses, as shown on the Form 1098-T. It would be the client's responsibility to tell you what the client PAID during calendar year 2011, regardless of what was/was not shown on the Form 1098-T. The qualifying expenses would also first be reduced by the amount of the scholarship. It should be noted there is a possibility that, for 2011, you could have neither any eligible education credits to claim nor any taxable scholarship income.

For 2012, the best route is to amend the return to remove the taxable scholarship income **IF** the facts support such.

I guess you could, in theory, take a "too large" education credit in 2011 (ignore scholarship issue) and then pay taxes on the "taxable" amount of the scholarship in 2012, but that seems terribly awkward.

What did, or did not, originate via loan proceeds is irrelevant as those simply become additional "payments."

Of course, if this was the student's freshman year, you will face the same scenario for the other college years. (Or, flipside, this is not the first year this problem might have surfaced!) It's always best to get all of the relevant facts straight first, especially if a student wants to file a quick TurboTax return. . . Reliance on only a Form 1098-T information can lead to disastrous results!

From personal experience, it is not uncommon (for a given education period) for the qualifying expenses to be "billed" in one calendar year, and a companion scholarship to be "paid" in a different calendar year. It is necessary to get a complete picture of what went on, to include when the payments were made for/by the student. The Form 1098-T is merely a guideline....and a darn poor one at that!

A common example would be a student who receives a 2011 Form 1098-T with spring 2012 charges billed, and zero "paid." Student was aware of pending scholarship, and paid all expenses, less the scholarship amount, by 12/31/2011. In early 2012 scholarship funds went to bursar account, and THOSE funds did not show up until the 2012 Form 1098-T was issued. Student rightfully claimed qualifying expenses, reduced by scholarship amount, as a 2011 education credit. There was NO taxable income considered for 2012.

There have been many, many TTB discussions about Form 1098-T and how to allocate payments/credits on these boards. You might want to find those discussions.

FE

[Burke]

Yes, I think you and I hashed out these issues to a large extent in a thread last year. I was hoping I missed something. This was her senior year, so there was only one semester involved in 2012. I have the transcripts for all four school years, and there is nothing that would warrant amending any of the previous years' returns. We took the maximum eligible credit in 2011 without consideration of this Dec payment. (It's an expensive private college.) And as you say, the scholarship/grants were all shown on the bill, so the payors knew what they were going to be, but they were not released until 2012 and shown on the 2012 1098-T. Using them in 2011 would eliminate the credit entirely and perhaps incur taxable income in that year for the parents, as they claimed her in 2011. It's one of the things I want to put in my newsletter to clients this year; it may be prudent to pay tuition early for the Spring semester in the freshman year to maximize the credit, but NOT to do this in the Senior year. It would depend of course on the amount of tuition, and the amts of scholarships and grants (which are not always known up front.) Unfortunately, we as preparers are almost always dealing with these situations after the fact.

[FEDUKE404]

Scholarship income may go away?

While I see your point on issues for prior years (somewhat offsetting errors??), I still don't see how....with the full facts on the table....there is any taxable income from the "2012" scholarship.

The Form 1098-T is unlike a Form 1099-DIV or Form 1099-R. I would think you could legitimately make the "taxable" 2012 scholarship amount go away so long as the tax credits for years through 2011 were correct.

As mentioned before, a family member faced almost exactly the same scenario. There was a scholarship for each of the eight semesters (not a super-expensive private school). The Form 1098-T for the first year showed qualifying expenses for two semesters but only one scholarship (fall semester) amount. The Form 1098-T for the final year showed zero qualifying expenses but a scholarship amount (spring semester, senior year). For all intents and purposes, with the facts being available, I took the "same" net amount as education credits for each semester of the years involved, and showed no scholarship "income" for final year. Just to be sure I'm clear: College required payment of upcoming spring expenses prior to 12/31 of the preceding year.

You do need to be a bit careful regarding your term "using" the scholarship for year A or year B. I do NOT know the answer, but there may be something rattling around in the education tax credit rules about the correct application of scholarships (again, frequently received in a "wrong" year) to otherwise eligible expenses. To a certain extent, it's not unlike claiming a big 2011 medical bill on Schedule A, while the insurance payment did not arrive until 2012. One could assume most people would amend 2011 (to show a smaller deduction) versus claiming taxable income on 2012. Could be wrong...

Good luck. Send me a copy of your newsletter.

FE