Education Credit

[Brian EA]

Student paid out of pocket for the first term she attended college. Grants and scholarships covered the second term.
Can student claim the credit for the first term?
Thanks
Brian

[Lion]

Can she be claimed by anyone as a dependent?

[FEDUKE404]

Point raised by Lion is important.
Otherwise, "qualifying expenses" (as supported by a Form 1098-T) paid during 2024 and not reimbursed) should be available for the various education tax credits.
(It should also be noted that taxable income can be generated if a scholarship pays for such things as room/board.)

[Brian EA]

Taxpayer cannot be claimed as a dependent. Her filing status is HH with one dependent. She received a 1098T from the institution that shows Grants and scholarships greater than the payment she made. Those grants and scholarships covered the second term. Part of the payment shown in Box 1 is what she made in the first term.

[Lion]

Tell your client to get you the bursar's statement, probably available online from her college, to tell you the dates. By first term and second term do you mean something like the fall term of 2023 and spring term of 2024? If so, the dates on the bursar's statement will help you determine what was in tax year 2023 vs tax year 2024.

Duke makes an important point about taxable income from scholarships that cover more than just tuition/required fees.

A quick webinar on education credits will help you prepare this return accurately.

[Brian EA]

It was all in 2024. She started in May, paid cash for the first term and then applied for grants in the Fall. Grants and scholarships covered the tuition for the Fall term.
My question is, can she be allowed to claim the credit in the first term if it's broken down on a term-by-term basis?

[Rapid Robert]

She received a 1098T from the institution that shows Grants and scholarships greater than the payment she made.

Well, now at least we have found the problem, that the 1098-T was not prepared properly. Per instructions, "Enter the total amount of payments received for qualified
tuition and related expenses from all sources during the calendar year. ... The amount reported [in Box 1] is not reduced by scholarships and grants reported in box 5." Therefore it should not be mathematically possible for Box 5 to be greater than Box 1.

So you should enter the proper amount for expenses paid, overriding the form, and then you will have an amount that is potentially eligible for the credit. Will this generate a CP2000 letter? Possibly, which may require providing additional documentation to IRS. Or get the institution to correct the 1098-T.

But just to clarify your question, no you can't segregate the calendar year into separate parts and base the credit on only part of the year. Again, that is not the issue here.

[Brian EA]

1098T info
Box 1 - $3647 includes $937 cash payment made for Term 1

Box 5 - $5032 - all for term 2
Can I override the info on the 1098T by using the $937 for the credit.
That is the question

[kathyc2]

Therefore it should not be mathematically possible for Box 5 to be greater than Box 1.

That is not uncommon. Some grants/scholarships will pay for items such that aren't covered as to what qualifies for Box 1 items. The amount received over Box 1 may be taxable if not used for books, supplies, etc that are required.

[kathyc2]

1098T info
Box 1 - $3647 includes $937 cash payment made for Term 1

Box 5 - $5032 - all for term 2
Can I override the info on the 1098T by using the $937 for the credit.
That is the question

Can she show that every dollar of the 2,710 "extra" she received for fall was used for education related expenses? If she just put it in her bank account and used it for regular expenses, then it's just fungible money.

[dtlee]

That is not uncommon. Some grants/scholarships will pay for items such that aren't covered as to what qualifies for Box 1 items. The amount received over Box 1 may be taxable if not used for books, supplies, etc that are required.

You are very correct. It is also not uncommon for grants/scholarships to be for different academic periods since school years generally do not align well with the calendar. I have seen grants paid in December for Tuition not billed until January and Tuition billed in December with the grants applied in January. The bursars statement (possibly covering multiple school years but at least the calendar year in question) is needed to properly compute any education credit.

[Rapid Robert]

Some grants/scholarships will pay for items such that aren't covered as to what qualifies for Box 1 items. The amount received over Box 1 may be taxable if not used for books, supplies, etc that are required.

Yes, you are right (although I don't think we know how common/uncommon it is). I should have said, "it is mathematically impossible for the amount in Box 5 used for qualified education expenses to be larger than the amount in Box 1".

At least I got the part right about how you can't base the credit on only part of the calendar year.

[Rapid Robert]

YI have seen grants paid in December for Tuition not billed until January and Tuition billed in December with the grants applied in January.

FIrst, amounts billed are irrelevant, and Box 2 is no longer used for that. Box 1 is to report payments received during the calendar year. Boxes 4, 6, and checkbox 7 are to show possible adjustments for prior or future years.

I agree the bursar's statement is helpful, but ever since Box 1 became mandatory, and if the scholarships don't include non-qualified expenses, then I think 1098-T should be sufficient, after all it is all that the IRS receives.

[Snaggletooth]

Why can't the 1098-T simply give information for the calendar year? Colleges and Universities are supposed to be smart people, so this should be simply for the Business Office to do.

Employers, dumb or not, are faced with much more difficulty in issuing W-2s than the 1098-T/

[FEDUKE404]

Ah. . .the annual Form 1098-T discussion appears again.

The bottom line is something like a bursar statement is necessary, to reconcile the expenses shown on the Form 1098-T. Both amounts paid, **when** they were paid, and which student expenses were / were not "qualifying." Many such expenses paid are NOT qualifying expenses for tax credits etc.

When my daughter was in college, there was always a lag time in posting scholarships/grants on the Form 1098-T. Although applied to fall/spring bursar bills in year X, the "scholarship" amount always showed up on the Form 1098-T for year X+1. (I was told such funds did not reach the university until early in year X+!.) For senior year, all education fees for two semesters were paid by end of calendar year X, and for the succeeding calendar year X+1 the ONLY information on that Form 1098-T was "scholarship" income."

I came to dread dealing with any client education credits since it was often difficult for me to obtain all of the relevant information.

And, yes, it is QUITE possible (and common) for scholarship/grant income shown on a Form 1098-T to generate taxable income. Any student who receives a scholarship, especially a free-ride merit-based scholarship that covers room/board, is definitely staring down the barrel of taxable income. Slight caveat: I have not had to deal with any Form 1098-T in the most recent years, so there may be different reporting rules for the preparation of the tax document. Regardless. . .taxable income can never be disregarded.

Carry on. . .

FE