Tax Breaks

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Check with Your Tax preparer or the IRS about the latest status of this benefit.

One of the best financial rewards for attending college is the IRS's tax break for students attending qualified educational institutions. Unfortunately, many families may overlook these programs because important tax information is usually sent to the

This common oversight can be avoided when you understand what to do when you receive Form 1098-T: Tuition Payments Statement. It is the information return that colleges and universities must issue for a student's eligibility for the American Opportunity and Lifetime Learning credits. These and other education credits are explained in IRS Publication 970, Tax Benefits for Education, available online at www.irs.gov.

Most accredited public, nonprofit, and private postsecondary institutions, such as colleges, universities, vocational schools, or other institutions, must file Form 1098-T for qualified tuition and related expenses. Expenses can be reported as the amount received or billed for qualified tuition and related educational expenses from any source during the calendar year.

The 1098-T is mailed or electronically sent to each student and the IRS. Unlike a W-2, it is an informational return that reports qualified expenses and other information to determine whether the taxpayer qualifies for these credits. It must not be submitted with the taxpayer’s federal income tax return.

Students should be as sensitive to the importance of Form 1098-T as they are to receiving their W-2. If they have not received a duplicate copy by the end of January, they should contact their financial aid office to find out how to get one. Delivery problems can occur if the student’s address or e-mail account is not current.

Form 1098-T reports qualified expenses regardless of whether they were paid in cash, loans, or other forms. In other words, it shows what the student was charged for regarding qualified education expenses. The back of this form provides other explanations.

If this is so simple, how can there be any problems?

Although the rules are well explained, please know the following trouble spots.

The parents who claim the credit for themselves, a spouse, or the student they claim as their dependent and take tax exemption can claim the credit even if the student did not contribute to their education.

• A student can claim the tax credit if they take the tax exemption and are not claimed as a dependent on their parents' tax return. 

• Families should determine the economic tax advantages and consult a tax professional when deciding who should take the tax exemption. 

• Parents cannot take the credit if their filing status is married filing separately

• Taxpayers can file amended tax returns to recapture these credits per IRS regulations that applied to the years they could have taken them.

The American Opportunity Credit Act allows up to a $2500 tax credit per eligible student to reduce the amount of income tax paid. This credit reduces taxes, unlike a deduction that reduces the amount of income subject to this tax. The tax credit is available for only four tax years per eligible student pursuing an undergraduate degree or other recognized educational credential. The student must be enrolled at least half-time for at least one academic period that begins during the tax year. Qualified expenses are tuition and fees required for enrollment. Course-related books, supplies, and equipment must not be purchased from the institution to qualify. There can be no felony or drug convictions on a student’s record. This deduction is subject to income limits described in Publication 970

The Lifetime Learning Credit allows up to a $2000 tax credit per return to reduce the income tax paid. The tax credit is available for an unlimited number of years. The student does not need to pursue a degree or other recognized educational credentials and may take one or more courses. Course-related books, supplies, and equipment paid to the institution qualify. Students with felony drug convictions are eligible. This deduction is subject to income limits described in Publication 970.