Form 1098-T is not controlling

The Tax Court bases an American opportunity tax credit on an amount not reported on Form 1098-T.
By Charles J. Reichert, CPA

The Tax Court held that a taxpayer was entitled to claim the American opportunity tax credit based on the tuition and fees paid from student loan proceeds disbursed during calendar year 2011, for which the credit was claimed. Even though a portion of the tuition was billed in 2010, it was for the spring semester starting in January 2011 and therefore could be included. According to the court, the credit amount was not limited by the amount reported on Form 1098-T, Tuition Statement, as billed by the educational institution in 2011.

Facts: Angela Terrell was a full-time student at Hampton University in Virginia. She registered in the fall of 2010 for 2011 spring semester classes. For her 2011 spring semester tuition and fees, the university billed her $2,460 on Nov. 23, 2010, and an additional $1,180 on Jan. 10, 2011. The entire $3,640 was paid on Jan. 20, 2011, from proceeds of her student loan.

In January 2012, Hampton sent Terrell a Form 1098-T showing $1,180 in box 2 as amounts billed for qualified tuition and related expenses in 2011 and nothing in box 1 as amounts paid for those expenses in 2011. On her 2011 federal income tax return, Terrell claimed a credit of $2,500, of which $1,500 was a nonrefundable credit and $1,000 a refundable credit. In 2014, the IRS disallowed Terrell's entire credit, sending her Notice CP3219A requesting her to provide a signed explanation to support the amounts that she had used to calculate her claimed credit. Terrell petitioned the Tax Court for a redetermination.

Issues: Taxpayers may claim an American opportunity tax credit for their qualified tuition and related expenses paid to eligible educational institutions. The credit is equal to 100% of the first $2,000 of qualified expenses paid during an academic period beginning in the tax year, plus 25% of the next $2,000 of such expenses. It is 60% nonrefundable and 40% refundable and can be claimed for up to the first four years of a student's postsecondary education. The student must be enrolled at least half time.

For the tax year in question, educational institutions were allowed to report either the amount of tuition paid for the student's qualified expenses or the amount billed by the university during the tax year on a student's Form 1098-T. The IRS argued the $1,180 reported on Terrell's Form 1098-T as amounts billed for tuition during 2011 controlled the amount of her credit.

Holding: The court held that the relevant amount used to determine the American opportunity tax credit is the amount actually paid during the tax year by the student (including by proceeds of a student loan paid directly to the educational institution on the student's behalf) and that the amount reported in box 2 of Form 1098-T billed during the tax year does not control the amount of the credit. Therefore, Terrell's 2011 qualified tuition and mandatory fees were $3,640, and that amount should be used to compute her credit, according to the court. The court noted that the $3,640 would appear to result in a credit of $2,410 ($2,000 + [25% × $1,640]), rather than $2,500.

The Protecting Americans From Tax Hikes Act of 2015 (included in the Consolidated Appropriations Act, 2016, P.L. 114-113) changed the Form 1098-T reporting requirements. For expenses paid after Dec. 31, 2015, institutions must report the total amount received for qualified tuition and related expenses from the student during a tax year and no longer have the option of reporting the amounts billed. However, the IRS stated in Announcement 2016-17 that it will not impose penalties under the new law for Forms 1098-T required to be filed and furnished for the 2016 calendar year if an institution reports the amount billed instead of the amount received. (see "Tax Matters: Tuition Statements Still Might Not Report Amount Paid," JofA, July 2016, page 74).

  • Terrell, T.C. Memo. 2016-85

—By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.

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