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Form 1098-T and the “Alternative”

Form 1098-T – which is due to students by January 31 each year and due to the IRS by February 28 – watch carefully for eFiling requirements - has seen a lot of “press” over the past few years.  There have been changes in the manner in which payments were applied, the “dissolution” of Box 2, and issues with timely filing that required IRS intervention.

One question we often get concerns “who may file Form 1098-T and provide it to students?”  The answer – per the IRS – is: an “Eligible education institution.”

What’s that?  Here goes…

An eligible educational institution is a college, university, vocational school, or other postsecondary educational institution that is described in section 481 of the Higher Education Act of 1965 as in effect on August 5, 1997, and that is eligible to participate in the Department of Education’s student aid programs. This includes most accredited public, nonprofit, and private postsecondary institutions.

Form 1098-T provides students with data that may allow them to offset the cost of higher education and avoid potentially costly errors with the IRS with regard to education tax credits.

The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) can reduce a taxpayer's income tax liability dollar-for-dollar for qualified education expenses paid in the year.  These valuable credits can help offset the cost of higher education.

Okay, next question.  What if our institution is not yet an “eligible education institution?”

In this situation, your institution would not be able to provide students with a Form 1098-T for a given year.  However, there is an Alternative: Form 886-H-AOC and the guidance therein.  This is not a form you would file but a “guidesheet” that is generally used by the IRS when “auditing” taxpayers who claimed the American Opportunity Credit.

So, the student should be able to take advantage of educational credits – even without a Form 1098-T – but they need to be diligent about DOCUMENTING enrollment and payment data.  The students (or parents) who want to claim the credit(s) but did not receive a Form 1098-T should be aware that they will need to document:

Proof of enrollment -

·       If any institution did not provide Form 1098-T, copies of other documents that verify enrollment, such as transcripts or other enrollment forms. The document(s) must include the institution’s name, federal identification number, dates of enrollment, and the student’s enrollment status (more than half time, not a graduate student).

·       Copies of proof of payment of tuition and fees such cancelled checks, bank statements, credit card statements or receipts. Form 1098-T may serve as proof of payment IF payments received are recorded in Box 1.

Proof of payment (of qualified expenses such as additional course related fees, books, and supplies) –

·       Copies of cancelled checks, bank statements, credit card statements or receipts.

·       Copies of documents that show the expenses were needed for a course of study, such as course guides, course syllabuses, or letters from the educational institution(s).

You should always remind your students that certain payment on behalf of the student will reduce the amount of “qualified expenses.”  Some of those “payments” include:

·       Employer provided educational assistance benefits

·       Withdrawals from any educational retirement arrangements

·       U.S. Savings bond interest that is nontaxable because you paid qualified higher education expenses

·       Veteran’s educational assistance benefits or

·       Any other nontaxable payment received for education expenses

Also, some expenses are often “confused” with qualified education expenses” although they are NOT.  These include:

·       Insurance

·       Medical expenses (including student health fees)

·       Room and Board

·       Similar personal, living or family expenses. This is true even if the amount must be paid to the institution as a condition of enrollment or attendance

Finally, you should note that this discussion does not mean that an “eligible educational institution” can simply forego providing/filing Form 1098-T and advise their students of the procedures mentioned above.  It you are an eligible educational institution you generally MUST complete/file Form 1098-T each year for each student you enroll and for whom a reportable transaction is made (with stated exceptions in the instructions).



Written by

David C. Moja, CPA

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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