American opportunity tax credit calculations

[VGSailor]

Hello all,

I have a question regarding the American opportunity tax credit; specifically, it is regarding the calculation of qualified educational expenses. An example below shows my confusion:

Tuition for Fall2012 and Spring2013: $20,000
Room and board for Fall2012 and Spring2013: $10,000
Paid out of pocket in 2012: $30,000

In the above example, my qualified educational expenses is $20,000 since room and board doesn't apply. Ok, simple enough.

But in real life, it's not always like that.

Tuition for Fall2012 and Spring2013: $20,000
Room and board for Fall2012 and Spring2013: $10,000
Paid out of pocket in 2012: $20,000
Pad out of pocket in 2013: $10,000

So let's say you paid $20,000 in 2012 for Fall2102 semester and then $10,000 in 2013 for Spring2013 semester. In this case, i can't count the $10K that was paid in 2013. Where I'm confused is then how do I figure out my qualified educational expenses out of the $20,000? For instance,

Half-tuition (for Fall2012): $10,000
and Half room and board (for Fall2012): $5000

is only $15,000 and so that means that in 2012, I paid $5,000 for part of 2013 overall costs (tuition and room). So the question is what part of that $20,000 counts as qualified educational expense since I have to adjust for room and board? Do I just subtract $5,000 from the $20,000 and count $15,000 as qualified educational expenses? Or is it that it's $10,000 + ($5,000*0.67 = $3,350) = $13,350 as qualified educational expenses. The reason being that out of the $20,000 paid, $10,000 went to the Fall2012 tuition, $5,000 went to room and board Fall2012 (doesn't qualify), and the $5,000 that went towards Spring2013 is pro-rated according to the percentage that tuition makes up total costs (in this case $20,000 out of $30,000 or 2/3).

I know that the max is $4000 that you can claim, but for the sake of accurate record-keeping, I would like to know the right way to calculate this.

[MathWizard]

The school should send the college attendee (your child?) a 1099-T (tuition), use that figure.
TurboTax will walk your through enetering each box of the 1099-T.
My son has already gotten his. Make a copy to keep with your tax return.

[Kevin M]

The form is 1098-T (there is no 1099-T). I was able to get it online from my daughter's school. It included tuition only, not fees for parking and health center. You also can deduct books and supplies used for school.

Kevin

[HouseStark]

It's not unreasonable to use the 1098-T figures, but they are often wrong, so it's good to have an understanding of what you are paying. It shouldn't be that difficult to obtain and review an actual account statement from the institution. The statement should show what was billed and what was paid when, and whether it was qualified expenses such as tuition and fees, or whether it was other.

[Kevin M]

Here is a link to an IRS FAQ on the AOTC that you may find useful: http://www.irs.gov/uac/American-Opportu ... nd-Answers

Kevin

[Kevin M]

It's not unreasonable to use the 1098-T figures, but they are often wrong, so it's good to have an understanding of what you are paying. It shouldn't be that difficult to obtain and review an actual account statement from the institution. The statement should show what was billed and what was paid when, and whether it was qualified expenses such as tuition and fees, or whether it was other.

True. In my case, fees for health center, student representation, and transportation bus pass were not included in 1098-T amount, only "enrollment". However, fees that are required as a condition of enrollment are qualified expenses:

Related expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.
However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution.

However ...

Qualified education expenses do not include amounts paid for:

Insurance,

Medical expenses (including student health fees),

Room and board,

Transportation, or

Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

So it's appropriate that the health and bus fees were not included. Not sure about the student representation fee, but it was only $1 per term.

Amount spent on books purchased from the school bookstore were not included on the 1098-T, but these are qualified expenses along with books and school supplies purchased elsewhere. TurboTax asks about these separately.

Kevin

[VGSailor]

Thanks everyone for your replies.

I'm not sure if my question was clear or if I made clear what my question was.

I think it boils down to this. Let's say,

Tuition Spring 2013: $10,000
Room Spring 2013: $5,000

In December 2012, I pay $5,000 to cover some of the costs of 2013; In January, I pay the remaining $10,000. I can only claim the $5,000 that was paid in $2012.

But, how does that $5,000 get allocated in this case? Does all of it go to tuition, in which case $5,000 is qualified education expenses? Or does it all go to room and I can claim none of it? Or do I do the prorated and say 2/3 * $5,000 = $3,333?

This is what doesn't make sense to me. It's not like that $5,000 went towards something specific. It was just a payment that gets credited to the overall bill. Right now, I favor the prorated method.

EDIT: I also realize that TurboTax asks me for what I paid. That is what I'm trying to figure out and hence my question above. I'm sure I'm not the only one, so I feel like I'm missing something.

[Kevin M]

Did you miss the part about the 1098-T for tax year 2012? What does it show? Then, can you get a breakdown of your payments to the school and compare them to the 1098-T?

Kevin

[Kevin M]

OK, so even though the 1098-T may show the amount billed for 2012 as $10,000, you didn't pay all of it (my 1098-T does not show amount paid, only amount billed). If it were me, I'd do whichever was to my advantage depending on my tax situations in 2012 vs. 2013. Otherwise, it doesn't matter, since the credit you don't get this year you'll get next year; I think I'd keep it simple and just count the entire $5,000 paid in 2012 as a qualified expense, then include the other $5,000 as qualified expense for 2013.

Kevin

[VGSailor]

OK, so even though the 1098-T may show the amount billed for 2012 as $10,000, you didn't pay all of it (my 1098-T does not show amount paid, only amount billed). If it were me, I'd do whichever was to my advantage depending on my tax situations in 2012 vs. 2013. Otherwise, it doesn't matter, since the credit you don't get this year you'll get next year; I think I'd keep it simple and just count the entire $5,000 paid in 2012 as a qualified expense, then include the other $5,000 as qualified expense for 2013.

Kevin

Yes, the 1098-T has an amount for box 2, which is what is billed, but not necessarily what is paid to the institution.

Thanks Kevin. This is probably what I will do. As I mentioned above, in my situation, the specifics become a moot point, because no matter what I do, it is above the $4,000 max that you are allowed for qualified education expenses. I was just wondering how to allocate so as for record-keeping. I like your suggestion to keep it simple.

[Kevin M]

Yeah, think of it from the IRS perspective, they see $10K on the 1098-T and you report less than that for 2012; no problem. In 2013 maybe if you get billed more than $4K on your 2013 1098-T, I'd just report that for 2013 and not bother with anything else, since it won't affect your tax credit amount. Otherwise, you have the 1098-T for 2012, along with your records of payments made in 2013, to justify reporting another $5,000 in 2013.

Kevin

[jared]

Thanks everyone for your replies.

I'm not sure if my question was clear or if I made clear what my question was.

I think it boils down to this. Let's say,

Tuition Spring 2013: $10,000
Room Spring 2013: $5,000

In December 2012, I pay $5,000 to cover some of the costs of 2013; In January, I pay the remaining $10,000. I can only claim the $5,000 that was paid in $2012.

But, how does that $5,000 get allocated in this case? Does all of it go to tuition, in which case $5,000 is qualified education expenses? Or does it all go to room and I can claim none of it? Or do I do the prorated and say 2/3 * $5,000 = $3,333?

This is what doesn't make sense to me. It's not like that $5,000 went towards something specific. It was just a payment that gets credited to the overall bill. Right now, I favor the prorated method.

EDIT: I also realize that TurboTax asks me for what I paid. That is what I'm trying to figure out and hence my question above. I'm sure I'm not the only one, so I feel like I'm missing something.

I disagree with most of the responses. The determination should be made by the institution. In this case, ask them how the $5,000 payment was applied.

It's not a choice and you certainly can't just plug in the amount from the 1098-T.

[jared]

See Federal Tax Regulations,regulation,§1.25A-2(d)(4)

(4)Treatment of a comprehensive or bundled fee.— If a student is required to pay a fee (such as a comprehensive fee or a bundled fee) to an eligible educational institution that combines charges for qualified tuition and related expenses with charges for personal expenses described in paragraph (d)(3) of this section, the portion of the fee that is allocable to personal expenses is not included in qualified tuition and related expenses. The determination of what portion of the fee relates to qualified tuition and related expenses and what portion relates to personal expenses must be made by the institution using a reasonable method of allocation.

"Personal expenses" include room and board

(3)Personal expenses.—Qualified tuition and related expenses do not include the costs of room and board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses, regardless of whether the fee must be paid to the eligible educational institution for the enrollment or attendance of the student at the institution.

[VGSailor]

Jared,

Yea, I guess this was my question. Thanks for finding that source of information for me. It seems to me the most straightforward way to figure it out is to just ask the school.