Education Credits for What You Actually Paid

Educational tax credits can help taxpayers save when they file their return if they incurred any education-related expenses during the year. However, as the student in the following situation discovered, educational tax credits are based on what you actually paid, not what was billed.

The Situation

In 2010, the full-time Hampton University student registered for classes occurring in the Spring ’11 semester. When she registered for classes, the school billed her $2,460 for tuition in relation to the courses she chose. Once the schedule was finalized and her classes were set, the university added an additional $1,230 to her balanced based on the final schedule on January 10, 2011.

This student primarily paid her educational expenses with student loans, which were not disbursed until ten days after the schedule was set. On January 20, 2011, the university directly received the funds from the loans, which prompted the school to generate a Form 1098-T, Tuition Statement for 2011.

This form, which is sent to both the student and the IRS, recorded no tuition payments received (Box 1), but stated $1,180 in billed qualified tuition and expenses (Box 2). The amount billed as represented in Box 2 referred to the $1,230 of tuition billed in January, along with a $50 mandatory fee. A $100 tuition credit was subtracted from the amount billed, leaving a total of $1,180 as stated on the Form 1098-T.

When filing her tax return for 2011, the student claimed the American Opportunity Credit of $2,500. Unfortunately, the IRS did not accept the credit, and issued a disapproved statement of: “Your eligible educational institution did not verify the amount claimed on your tax return, in box 1 of Form 1098-T, Tuition Statement.”

During a court proceeding, the taxpayer offered statements on official school letterhead which itemized her tuition charges in relation to the spring 2011 semester as follows:

  • November 23, 2010 – Tuition Charge – $2,460
  • January 10, 2011 – Tuition Charge – $1,230
  • January 25, 2011 – Degree Fee – $50
  • February 9, 2011 – Tuition Credit – $100

The statement’s net total was $3,640 for the spring semester, which showed that student loan –disbursements paid the university directly on January 20, 2011. Because the student is considered a cash basis taxpayer, the court ruled that she paid $3,640 in tuition on January 20, when the loans were dispersed.

Regulation section 1.25A-5(e)(3) determines the correct years to claim the American Opportunity Credit would be 2011. Despite the IRS assertion, the Form 1098-T offers a similar stance. The amount the student was billed doesn’t affect the amount of her credit, which is determined by the amount paid – not billed. With this evidence, the correct amount of the student’s credit for 2011 is $2,410. Breakdown: 100% of $2,000 and 25% of $1,640.