1098-T & 529 question

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jchris
Posts: 127
Joined: Sun Sep 21, 2014 5:55 pm

1098-T & 529 question

Post by jchris »

Hi everyone. This is the first year we’re paying college tuition and dealing with the tax implications, and it’s all a bit confusing. I am trying to use Livesoft’s strategy of paying the first $4K of qualified education expenses out of pocket, in order to qualify for the max AOTC credit, and then use 529 and scholarship money for remaining qualified expenses (my son also received some scholarship money, which complicates things a bit).

DS is attending an in-state university (Maryland), where his expenses for Fall semester 2016 were as follows:
Tuition: $4,157.50
Mandatory Fees: $933.00
Room: $3,402.50
Board: $2,287.00

My understanding is that Tuition and Fees qualify for AOTC, but that 529 money can be used, tax free, for all of the above. The scholarship guidelines from Maryland also indicated that his scholarship money could also be credited toward tuition, fees, and room/board.

So we sent a $4k check to Maryland in July and told them to credit it toward Fall tuition, asked them to credit all his Fall scholarship money to remaining tuition, fees, and room/board, and paid the remainder from the 529 plan.

Now I’ve received the 1098-T from Maryland. Block 1 is empty. Block 2 shows all tuition and fees for both the Fall 2016 semester and the Spring 2017 semester. We were billed for spring semester tuition and fees in December, but purposefully didn’t pay the 2017 semester tuition and fees until early January, so that I could show – via the date on the check – $4K out of pocket for both 2016 and 2017.

Another issue is that Maryland seems to assume that all scholarship money goes toward tuition, regardless of what we requested. Block 5 on the 1098-T contains the full value of my son’s scholarships for both fall 2016 and spring 2017 semesters. The net result of all of this is - if I subtract the amount in block 5 from the amount in block 2 of the 1098-T, I get less than $4K.

We really did spend $4k out of pocket in 2016 for tuition and fees, but I am concerned that if I claim that on my tax return, it will send up a red flag at the IRS and I will get a letter. Is there any way to avoid this? Anyone have a similar situation before and have advice for how to handle?

Thank you!!
jchris
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MikeWillRetire
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Re: 1098-T & 529 question

Post by MikeWillRetire »

I have two children at the same university. Here is what I found on their website
http://bursar.umd.edu/t_taxInfo.php


"Please read the Instructions for Student on IRS Form 1098-T and visit the Additional Resources area below to help you understand your form.

The IRS allows institutions to report either box 1 (amounts paid) or box 2 (amounts billed) during the calendar year. We report box 2 as our filing method. However, education credits may only be claimed for qualified tuition and related expenses that were actually paid in the calendar year. Therefore, the amount shown in in box 2 may represent an amount other than the amount actually paid.

Most often, spring semester charges are billed in December of one calendar year and then payments are made in January of the next calendar year. Check to see if box 7 is checked on your form. Reference either the Student Account Inquiry or your monthly billing statements for the timing of the charges and payments."
jebmke
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Re: 1098-T & 529 question

Post by jebmke »

I do taxes for TaxAide in MD. My experience is that college 1098-Ts are notoriously inaccurate. We always ask the taxpayer what was actually paid out of their pocket and file the 8863 accordingly. I am not aware of any issues that have come up. We usually hear from the taxpayer if their return is adjusted.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Topic Author
jchris
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Re: 1098-T & 529 question

Post by jchris »

Thanks for both replies. It sounds like I should just claim the credit based on what I actually spent out of pocket and not worry too much about what the 1098-T says. I can do that but I always get nervous about submitting a return that appears to have an audit flag. I guess I'll just have to trust that if I keep good records, if I do get an IRS letter, I can substantiate my claim pretty easily. I guess lots of families must have this issue, so it's not like the IRS doesn't see it all the time.

jchris
livesoft
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Re: 1098-T & 529 question

Post by livesoft »

The 1098-T forms that we have received for two students have always reported across the year-end into two tax years. We just report what we actually did and ignore the 1098-T. Tax software will help you in this regard, too, since this happens ALL THE TIME.

I think the law may have changed so that universities have to use a calendar year and not school year in the future.

Anyways, after 7 years of tax returns with 1098-T forms and 1099-Q forms, we have not received any hassles from the IRS. We don't even put an explanatory note with our return.
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Kenkat
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Re: 1098-T & 529 question

Post by Kenkat »

Agree with the others that the amount on the 1098-T and the amount you actually claim will typically not match. I had exactly the same situation last year. I used TurboTax last year and it was not particularly helpful in guiding you towards reporting everything correctly. I ended up going to the IRS website to make sure I did everything correctly. The are several good sections on the AOTC and college tax credits in general.
Topic Author
jchris
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Re: 1098-T & 529 question

Post by jchris »

Thanks livesoft and kenschmidt for your replies. I'll review the IRS material and do my best with TurboTax.
GreenGrowTheDollars
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Re: 1098-T & 529 question

Post by GreenGrowTheDollars »

I suggest that my families write checks for the $4K of allowable expenses and note in the memo line that it is for "Spring 2017 tuition & fees." Make a copy of the canceled check and stash it in your tax file for the year.

Books, supplies, and equipment required for the courses also count towards the $4K if they were paid not using 529 account funds.
Topic Author
jchris
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Re: 1098-T & 529 question

Post by jchris »

Related scholarship & tax question: Part of son's scholarship money was from an outside organization - the money was sent directly to him as a check, with no strings attached. However, he didn't receive it until late in the year - 2016 tuition, fees, room, board, etc., were already paid for via other means by that point. So, although it hit his bank account in 2016, it will go toward 2017 college expenses. Do I have to report it as unearned income on his 2016 return, or can I report it on his 2017 return (which would reduce and possibly eliminate his tax liability for both years)?
Mr. Benedictine
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Re: 1098-T & 529 question

Post by Mr. Benedictine »

Similar issues with us. This is also my first year doing this. I paid fall and spring tuition, room/board, fees, books all in 2016 though. Paid everything with a credit card

Tuition, fees both semesters: $14,665
Room/board both semesters: $14,323
Supplies/books/laptop: $1,818

total above: $30,805.77
529 withdrawals: $27,400.21
difference: $3405.56

Can I apply the $3405.56 toward the AOTC?
livesoft
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Re: 1098-T & 529 question

Post by livesoft »

^Maybe, if your income is low enough. Also, I am not sure if your 2017 expenses paid in 2016 are eligible for a 2016 AOTC.

A first step is to read IRS Publication 970.
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Kenkat
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Re: 1098-T & 529 question

Post by Kenkat »

From Pub 970:

------------------------

The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for adjusted qualified education expenses paid in 2016 for an academic period beginning in 2016 or beginning in the first 3 months of 2017.
For example, if you paid $1,500 in December 2016 for qualified tuition for the spring 2017 semester beginning January 2017, you can use that $1,500 in figuring your 2016 credit.

------------------------

Also note the room and board is not eligible for AOTC. In general, you want to pay $4,000 out of pocket before you tap 529, etc. You will still get most of the credit for 2016.
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teen persuasion
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Re: 1098-T & 529 question

Post by teen persuasion »

1098-T forms are almost invariably incorrect. Keep your own records of amounts paid and sources. The instructions I have seen from the IRS seem to encourage treating college $$ as fungible.

My kids' colleges generally assign scholarship money to tuition and fees first, since scholarships used for those are tax free. Scholarship $$ used for R&B is taxable and should be added to line 7 income. We plot out how best to allocate different pots of college $$ to limit taxes and maximize credits. Loan $$ can also be allocated as the first $4k of tuition to qualify for the AOTC. Some of the scholarship $$ get allocated to R&B, and we add that to line 7 as taxable income (the parents' return if we claim them as dependents, or the student's when they become non-dependent).

My DD1's college deliberately billed for spring semester early, with a December 8 due date for payment. This was actually useful - it meant that a whole year of college expenses fit in the tax calendar year, rather than the half/whole/whole/whole/half 5 year cycle you end up with otherwise. The AOTC can only be claimed 4 times per student, so you would be unable to claim it for the last semester. The other 3 colleges we've dealt with so far deliberately bill in January. :annoyed
desiderium
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Re: 1098-T & 529 question

Post by desiderium »

Last year I received a letter from the IRS questioning a 529 disbursement used in 2014 to fund a scheme where I paid 3 years' tuition for my son up front. It did not show up on the 1098-T. At the time, I didn't even think about whether this was permissible. I sent a letter explaining the expense and included a copy of the contract with the school, and they were ok with it.
WolfgangPauli
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Re: 1098-T & 529 question

Post by WolfgangPauli »

jebmke wrote:I do taxes for TaxAide in MD. My experience is that college 1098-Ts are notoriously inaccurate. We always ask the taxpayer what was actually paid out of their pocket and file the 8863 accordingly. I am not aware of any issues that have come up. We usually hear from the taxpayer if their return is adjusted.
I was audited because the 1098-T and what I claimed was off by about .05 cents. Not sure why, but I did "win" the audit. however, I had to go through the pain of proving. I would make sure your 1098-T matches or a computer is going to flag you then everything is open ..
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Kenkat
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Re: 1098-T & 529 question

Post by Kenkat »

WolfgangPauli wrote:
jebmke wrote:I do taxes for TaxAide in MD. My experience is that college 1098-Ts are notoriously inaccurate. We always ask the taxpayer what was actually paid out of their pocket and file the 8863 accordingly. I am not aware of any issues that have come up. We usually hear from the taxpayer if their return is adjusted.
I was audited because the 1098-T and what I claimed was off by about .05 cents. Not sure why, but I did "win" the audit. however, I had to go through the pain of proving. I would make sure your 1098-T matches or a computer is going to flag you then everything is open ..
This is confusing to me because my son's 1098-T will never match what I actually paid and claimed for the AOTC because 1) the college my son attends chooses to show amount billed in a given year while the AOTC is based on amount paid in a given year and 2) the 1098-T does not include items such as books which are permissible under AOTC.
jared
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Re: 1098-T & 529 question

Post by jared »

Mr. Benedictine wrote:Similar issues with us. This is also my first year doing this. I paid fall and spring tuition, room/board, fees, books all in 2016 though. Paid everything with a credit card

Tuition, fees both semesters: $14,665
Room/board both semesters: $14,323
Supplies/books/laptop: $1,818

total above: $30,805.77
529 withdrawals: $27,400.21
difference: $3405.56

Can I apply the $3405.56 toward the AOTC?
Consider using $4,000 of expenses for American Opportunity Credit. This will result in some of the 529 earnings being included as taxable income (not subject to penalty).  The tax credit is typically more than the additional tax liability.
masteraleph
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Re: 1098-T & 529 question

Post by masteraleph »

WolfgangPauli wrote: I was audited because the 1098-T and what I claimed was off by about .05 cents. Not sure why, but I did "win" the audit. however, I had to go through the pain of proving. I would make sure your 1098-T matches or a computer is going to flag you then everything is open ..
Did they use Box 1 or Box 2? Billed amounts are almost always off. Amounts received should be identical, though obviously there are some reasons they might not be.
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