The Tax Court case of Terrell, T.C. Memo. 2016-85, May 2, 2016 is an interesting case because not only does it address how much tuition a taxpayer can claim as an education credit, but also illustrates how useless the Form 1098-T is that is issued by most colleges and universities.
Looking at Form 1098-T, box 1 shows “Payments received for qualified tuition and related expenses.” Unfortunately, many schools of learning leave this box blank. Box 2 is usually completed by these schools and that box shows “Amounts billed for qualified tuition and related expenses.”
Since individual taxpayers are cash basis taxpayers, they are allowed tax deductions based on amounts paid, not amounts billed. Thus leaving box 1 blank does not tell the taxpayer what he paid to the learning institution as a qualified tuition or related expense.
In this case, the university filed with the IRS and sent to the taxpayer Form 1098-T, Tuition Statement. The form had no entry in box 1 for tuition payments received. Box 2 had $1,180 for amounts billed for qualified tuition and related expenses. Box 2 represented the $1,230 that was billed to the taxpayer on January 10, 2011, plus mandatory fees of $50, minus a tuition credit of $100.
On her 2011 return, Merrill claimed the American opportunity Credit of $2,500. The IRS disallowed the credit in its entirety, stating: “Your eligible educational institution did not verify the amount claimed on your tax return, in box 1 of Form 1098-T, Tuition Statement.”
In court, the taxpayer provided statements on official university letterhead showing an itemized schedule of the taxpayer’s tuition charges for the spring 2011 semester. This schedule showed a tuition charge of $2,460 on November 23, 2010, another tuition charge of $1,230 on January 10, 2011, a $50 degree fee on January 25, 2011, and a $100 tuition credit on February 9, 2011, for a total net tuition and related charges of $3,640 for the spring 2011 semester. The schedule further showed that the student loan proceeds paid the above tuition charges on January 20, 2011 when the loan proceeds were disbursed directly to the university.
The court said that since the taxpayer is a cash basis taxpayer, she is treated as having paid $3,640 of tuition on January 20, 2011, the date that the loan proceeds were disbursed. Accordingly, the 2011 tax year was the proper year to claim the education credit. Contrary to the IRS assertion, the Form 1098-T supplied by the university does not point to a different conclusion. The amount billed to the taxpayer during 2011 does not control the size of her credit. The credit is based upon the amount paid, not the amount billed.
When preparing our clients’ personal tax returns who wish to claim a tuition credit or deduction, we request that the taxpayer supply us with the bursar’s statement that shows amounts paid by the student during the calendar year. Contrary to the belief of many a taxpayer, the Form 1098-T showing the amount in box 2 is not the amount that can be claimed as an educational credit or deduction. If only the Form 1098-T is supplied by the taxpayer, and if box 1 is blank, then the tax preparer does not know the amount eligible to be claimed as a tax credit. Whereas current law allows education institutions to complete either box 1 or 2, hopefully the IRS will change its rules and require that box 1 be completed as that box is most important when preparing tax returns.
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