New Rules Can Produce New Problems – AOTC and 1098-T

Annette Nellen

In writing a summary of a recent Tax Court summary opinion, I realized that a 2015 law change may cause problems for some students trying to claim the American Opportunity Tax Credit (Section 25A), Lifetime Learning Credit (Sec. 25A) or Section 222 above the line tuition deduction starting in 2016.  A 2015 law changes requires an individual to have received a Form 1098-T from the university in order to claim the tax benefit.
In McCarville, TC Summary Opinion 2016-14 (4/4/16), M was a student at Arizona State University from August 2008 to graduation in May 2012. M paid his spring 2012 tuition of $4,895 on 12/18/11 although it was not due until January 25, 2012. He had already paid his fall 2011 tuition of the same amount on 8/6/11. In spring 2012, his only expense was textbook rental of $247. M claimed a $2,500 American Opportunity Tax Credit (AOTC) on his 2012 Form 1040A which also included wages from his part-time job. Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), was attached to the return.

ASU did not issue M a Form 1098-T for 2012 (likely because the tuition was paid in 2011). The IRS disallowed the AOTC claimed on the 2012 return. (It was easy for the IRS to spot because there was no Form 1098-T.)

At trial, the IRS acknowledged that M was entitled to an AOTC for 2012 of $247. The court agreed.

Observation: M’s problem was that he paid his 2012 tuition in 2011 when he had already paid $4,895 of tuition earlier that year, which caused him to reach his maximum AOTC of $2,500. While paying spring 2012 tuition two weeks early (in 2011) easily seems like a 2012 item to a layperson, the tax law is strict.

What guidance is available to students and their parents to avoid problems and maximize the AOTC? The 7 pages of instructions to Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), note that the payment must be in the year the credit is claimed. Many universities also include basic information and IRS links on their website about education credits.

Query: If instead of 2012, the year was 2016, is M unable to claim a $247 AOTC? Remember, he won’t have a 1098-T (because he paid nothing to the university in that year)? If this is the case, hopefully the IRS can correct this problem such as by requiring the university to note on the Form 1098-T $0 paid to the institution, but that the person was a student there for the spring semester.  Or perhaps Congress needs to modify the law to allow claiming of the textbooks and other related expenses that are not paid directly to the university. That could be noted on Form 8863. However, it seems contrary to congressional intent in requiring a Form 1098-T, which serves to show that the student actually attends a college.

What do you think?

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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2 comments on “New Rules Can Produce New Problems – AOTC and 1098-T

  • My concern is with the situation where the college includes spring tuition and fees on the previous year’s 1098-T. They attend college in the spring, pay the tuition in the spring, but may not be able to claim the AOC because the college doesn’t issue a 1098-T because they already included those expenses on the previous year’s 1098-T. This issue particularly hits students who are graduating in the spring. My wish is that the IRS would outlaw the option for colleges to include spring expenses on the previous year’s 1098-T.

  • Thanks for the comment. Another change made in 2015 effective for 2016 is that universities are to report the amount paid rather than the amount billed. Perhaps that will take care of the problem you mention.

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