Each year about this time, mailboxes across America are filled with tax forms. Sometimes, those tax forms go straight to a tax professional, unopened. Other times, taxpayers may dutifully open those forms and type the information, box for box, into tax preparation software. In both cases, it's not unusual for taxpayers to not have an understanding of the meaning of all of the numbers, letters and other information on those forms. That's about to change.
This month, I'll be dissecting some of the most basic tax forms for you. The more you know, the less scary some of these forms can be.
Next, here's what you should know about the form 1098-T, Tuition Statement:
A form 1098-T, Tuition Statement, is used to help figure education credits (and potentially, the tuition and fees deduction) for qualified tuition and related expenses paid during the tax year.
The Lifetime Learning Credit offers up to $2,000 for qualified education expenses paid for all eligible students per return. The amount of the credit is figured by calculating 20% of the first $10,000 of qualified education expenses – up to that maximum of $2,000 per taxpayer.
You can claim the $2,500 American Opportunity Credit for each qualifying student on your federal income tax return. Unlike the American Opportunity Credit, the Lifetime Learning Credit is not refundable which means that if your credit exceeds your tax, you won’t receive a refund of the difference. Forty percent of the American Opportunity Credit may be refundable which means that if the refundable portion of your credit is more than your tax, the excess (up to $1,000) will be refunded to you – even if you owe zero tax. (For more on educational tax credits, click here.)
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. The great thing about the tuition and fees deduction is that it's an adjustment to income (sometimes called an "above the line" deduction) which means that you don't have to itemize your deductions on Schedule A to take advantage of the deduction.
In most (but not all) circumstances, credits are more tax favorable than deductions. Compare the tuition and fees deduction to the American Opportunity Credit and the Lifetime Learning Credit to see what works best for you. It's an either/or: there's no double-dipping.
Note: the tuition and fees deduction was part of the extenders package passed in December 2014 which extend the deduction through the end of 2014 which means that you can take advantage of it for the 2014 tax return you file in 2015. However, as of now, the deduction is dead for 2015 (unless Congress renews it again).
Your identifying information and the identifying information of your college or university are reported on the left side of the form. Your Social Security Number may also be on the form - or just the last few digits. The first digits of the number may be redacted for your privacy. The address should be your permanent address which might not be your school address.
Financial information is reported on the right side of the form. In box 1, your college or university will report the total amount of payments paid by you for qualified tuition and related expenses. This amount will be less any reimbursements or refunds for payments received for qualified tuition and related expenses during the same calendar year. This amount will not be reduced by scholarships and grants reported in box 5. For most students, this is the box that matters the most.
Qualified tuition and related expenses are tuition, fees, and course materials required for a student to be enrolled at or attend an eligible educational institution. Amounts paid for any course or other education involving sports, games, or hobbies (unless part of your degree program or taken to acquire or improve job skills) and fees for room, board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses are not considered qualified tuition and related expenses.
Box 2 is used to report amounts billed to you for qualified tuition and related expenses. This is an alternate method of reporting for your college or university. This reporting method can be confusing because it may not actually reflect what you paid which is what you care about for credits and deductions. You'll want to have your records handy when preparing your return - especially if your college or university uses the billed method.
Your college or university may change its reporting method (from paid to billed) during the year. If this happens, box 3 will be checked.
At box 4, your college or university will report any adjustments made during the prior year. Pay attention to this box since it may reduce any allowable education credit that you claimed for the prior year and could result in an increase in tax liability for the year of the refund.
If you received scholarships or grants during the year, those will be reported at box 5. Those may or may not be taxable to you, depending on the specific circumstances. Here's a rule of thumb: a scholarship, fellowship or grant is tax free only if you are pursuing a degree at an eligible educational institution and you use the scholarship or fellowship to pay qualified education expenses. If you are not pursuing a degree, the full amount is subject to tax. (More info on scholarships and grants here).
Any adjustments to scholarships and grants from a prior year are reported at box 6. Since this amount may affect the amount of any allowable tuition and fees deduction or education credit that you claimed in a prior year, you might have to file an amended return for that year.
If any of the payments in box 1 or box 2 are payments for the next year, box 7 will be checked.
If you are at least a half student, box 8 will be checked; a half-time student is a student enrolled for at least half the full-time academic workload as defined by your college or university (the standards must equal or exceed the standards established by the Department of Education under the Higher Education Act).
If you are a graduate student, box 9 will be checked.
The IRS asks your college these questions in box 8 and box 9 because some credits and other tax benefits are limited to full time students or those at least half time pursuing an undergraduate degree.
Finally, at box 10, an insurer will report any insurance contract refunds or reimbursements made to you as a student during the year. As you might expect, any reimbursements or refunds may reduce the amount of any education credit you can claim.
You might not receive a form 1098-T if you are taking courses for which no academic credit is offered (even if you're otherwise enrolled in a degree program); if you are a nonresident alien student; or if your qualified tuition and related expenses are entirely waived or paid entirely with scholarships.
For more details on other tax forms, like the forms 1098-T and 1099, check out the rest of the series:
