If you have a child in college and the child receives a Form 1098-T, you may be able to take advantage of one of three different education tax benefits. What is even better is, if someone else is paying the tuition (per a Separation Agreement) but you are claiming the child as your dependent by using the dependency exemption, you may be able to use the benefit even if you didn’t actually write the check.
First things first though, did you get the Form 1098-T? If your student is anything like mine, they never forwarded the email to you from the school that told them back in January that the form was available for download. Some schools send the form directly to the student’s home address, while others will put it in a secure student portal for download. I have experienced both scenarios with my two daughter’s schools.
Form 1098-T (“T” for tuition) lists the amount received or billed for qualified tuition and related expenses for an academic period (January to March) in either Box 1 or Box 2. It also shows other figures, like Box 5 – the amount the student received in scholarships or grants and Box 8, which indicates whether the student was enrolled at least part time. In order to qualify for any of the education tax benefits, your student must be enrolled at least part-time at an ‘eligible’ institution. An ‘eligible’ institution includes virtually all accredited public, nonprofit and private postsecondary institutions.
Three Tax Benefits For Education
- The American Opportunity Credit,
- The Lifetime Learning Credit, and,
- The Tuition and Fees Deduction
Generally, you can claim one of these benefits if all three of the following requirements are met.
- You pay qualified education expenses,
- You pay the education expenses for an eligible student,
- The eligible student is a dependent for whom you claim an exemption on your tax return
Remember I said you may be able to claim the benefit even if you didn’t write the check? That is true for the first two credits, but it is not true for the Tuition and Fees Deduction.
American Opportunity and Lifetime Learning Credit
What is the difference between a tax credit and tax deduction? A tax credit, as in the first two benefits, yields a dollar-for-dollar reduction in the taxes you owe. A tax deduction, as in Tuition and Fees, lowers the portion of your income subject to tax. It is best to consult with your accountant to see which benefit is best for you, but generally, the credit is the better deal.
All the tax benefits have another qualifying feature, which may have prevented you from taking the credits or deduction when you were married. You cannot claim these benefits if your MAGI – Modified Adjusted Gross Income, is over a certain threshold. For the American Opportunity Credit, that amount for a Single or Head of Household filer is $90,000 for 2014 (Line 38 on your 1040). For the Lifetime Learning Credit, the MAGI is $64,000. Many women (or men) who are now single and are receiving alimony and/or child support, may find themselves in one of these income limits. Remember too, that child support is not included as income and therefor will not be a part of your MAGI.
One of the best features of these credits is that ‘qualified education expenses’ paid directly to an eligible educational institution for your dependent under a court-approved separation agreement (or divorce decree), are treated as being ‘paid’ by your dependent. So, if you claim that dependent, than you are considered to have paid those expenses and, assuming you meet all the other requirements, you are able to take the credit. This is especially useful if your ex-spouse or the child’s grandparents are making all or some of the qualified expense payments.
It’s important to understand what ‘qualified education expenses’ consist of. For the purposes of all the benefits, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Expenses for books, supplies, and equipment needed for a course of study are included in qualified expenses whether or not the materials were purchased from the educational institution. What this means is, that the amount billed for qualified tuition and related expenses on the Form 1098-T may not be the same as what you or someone else paid. If you can document ‘other related expenses’ that qualify, you may be able to use them when figuring the credit. Room and board, as well as certain other expenses, are not a qualified expense.
There is not enough room in this paper to address all the requirements and features of these two education credits, so you must consult with your accountant or visit IRS.gov to read ‘Publication 970 – Tax Benefits For Education’, for more detailed information and to see what else you need to qualify.
Some other restrictions exist like no ‘double-dipping’ – using the two benefits in tandem for the same student – but if you have two kids in school, you can use these credits for different students. It is also important to know that any amounts received in scholarships, grants, tax-free educational assistance and assistance by an employer, cannot be included as a qualified expense.
Tuition and Fees Deduction
This deduction may be beneficial to you, if you do not qualify for the American Opportunity or the Lifetime Learning Credit. But the important distinction is, that the person using the deduction must have actually paid the qualified expenses. For this deduction, you are not deemed as paying the expenses actually paid by the student or someone else. In order to claim this deduction, you must have paid the expenses, and you must be able to claim an exemption for the student as a dependent.
If, under a court-approved separation agreement or divorce decree, qualified educational expenses are paid directly to an eligible institution by someone else, those expenses are treated as being paid by the student – so, only the student (on their own tax return) can take the deduction.
Sometimes, it may make more sense and result in a larger tax benefit, if you do not claim your child as a dependent and let them file their own tax return. If you are over the MAGI income limits, your child may be eligible to take advantage of either the credits or the deduction. Again, your accountant will be able to run the two scenarios for you, to see who receives the greatest tax benefit.
If your child does file their own tax return and receives a tax refund, that money from Uncle Sam should be considered an added bonus and can be applied to next years’ tuition (although it may affect financial aid), or used to make a contribution to a Roth IRA, or even used to pay down student loan debt. How great is that?
Failing to look at your eligibility to take advantage of these education tax benefits or taking the wrong write-off for college is a common mistake that can keep you, your spouse or your child from getting the full refund you are owed.
Being aware of these benefits at the time of divorce and addressing them in your separation agreement or divorce decree can save money and conflict after the divorce, by ensuring that the right person is claiming the dependency exemption and that both spouses are taking full advantage of our tax laws according to their incomes.
It literally pays to be informed.
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Every divorce is unique and laws and practices vary from state to state. Be sure to consult with your attorney, financial professional, accountant and other professionals in your state to understand what applies to you and what is best for you and your family. Taking information out of context generally has negative consequences. This article is not meant to provide legal or financial advice.