The IRS has issued proposed regs that provide detailed guidance to higher education institutions on how to report tuition and other qualified expenses on Form 1098-T, Tuition Statement. The proposed regs also provide penalty relief for the institution’s failure to provide the student’s correct taxpayer identification number (TIN). In addition, the regs provide guidance to taxpayers eligible to claim education-related tax benefits.
Take away. Taxpayers use the information on Form 1098-T to claim education tax credits under the American Opportunity Tax Credit or AOTC and the tuition deduction imposes reporting requirements on schools to help determine whether a taxpayer is eligible for education tax benefits. The Tax Code and regs provide that a taxpayer can only claim education benefits if he or she receives Form 1098-T. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made the AOTC permanent and extended the tuition deduction provision through 2016.
Under prior law, schools could report either the total payments received or the total amount billed during the year. Current law now requires that for expenses paid after December 31, 2015, the school must report total amounts received during the calendar year. However, after schools reported difficulties in implementing this requirement, the IRS, in Announcement 2016-17, stated that it would allow schools to report amounts billed on 2016 Forms 1098-T.
Under the Trade Preferences Extension Act of 2015, for tax years beginning after June 29, 2015, a taxpayer cannot claim an education credit or deduction unless the taxpayer receives Form 1098-T with all required information. The information must identify the education institution and the student, including the student’s TIN and the school’s employer identification number (EIN). However, for statements required after December 31, 2015, no penalty will be imposed on an educational institution that fails to include the student’s TIN if the school complies with IRS requirements for obtaining the TIN.
The proposed regs reflect these reporting requirements. The proposed regs note that the amount reported on Form 1098-T may not reflect qualified expenses such as amounts paid to a vendor for course materials. The regs confirm that the taxpayer can claim these expenses as long as they can be substantiated, even though not included on Form 1098-T. The regs also provide that Form 1098-T is not required for certain exempt expenses, such as the costs of noncredit courses. The regs also propose new instructions to Form 1098-T that students may optimize their tax benefits by including a portion of an otherwise tax-free scholarship or grant in income; for example, by allocating a portion to living expenses.
To provide more precise information, the proposed regs require that an amount paid that relates to an academic period starting in the first three months of the following year must be specifically stated. The proposed regs also clarify the rules to determine amounts received for qualified expenses “during the calendar year.”