Saving Taxes by Understanding Education Credits

If you do not know how education expenses are reported and how education expenses are claimed, you may be missing thousands of dollars in tax savings. Here is how I discovered this fact:

This year I received my 1098-T (the tax document that reports how much a taxpayer paid for school) for qualified education expenses for attending my last semester of law school. I was shocked that my tuition shown in Box 1 and Box 2 of the form was blank. As other law students can attest, I paid a good chunk of money to attend law school and now it looked like I would not be able to take the extremely beneficial education credits or deductions on my 2011 income tax return.

But then I did a little research and realized that my 1098-T was correct, but at the same time it was incorrect. Following? The instructions to 1098-T indicate that an education institution may choose to report either payments received or amounts billed for the year. Many universities choose the amount billed because it is easier to fill out.

I am sure you can already see what happened. The University billed my Spring Semester Tuition for 2011 in December of 2010. But I did not pay that amount until January 2011. So my 2010 Form 1098-T had all the tuition I paid for 2010 as well as 2011. So the question: Are education credits and deductions taken when amounts are billed or paid?

The answer is that these credits/deductions are not taken until actually paid. The tax statutes are clear: education expenses are taken when the amounts are paid. Likewise, Publication 17 (Your Federal Income Tax guide) for 2011 states: “You cannot use any amount paid in 2010 or 2012 to figure your 2011 education credits.” Based on this, I called the University to see how much I actually paid in 2010 and 2011.

Be careful though, because this means that your prior years returns may be incorrect and may have to be amended. In the end, I completed this part of my return correctly and had a large benefit because I was able to get education credits/deductions in both 2010 and 2011.

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