Form 1098-T Guide: Claim Education Tax Credits

Form 1098-T Guide: Claim Education Tax Credits

Form 1098-T, Tuition Statement, is a crucial form for students and their families when filing taxes. This form is used to report tuition payments and related expenses for students attending eligible educational institutions. The information on Form 1098-T is key to claiming valuable education tax credits such as the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC), which can significantly reduce your tax liability.

If you or your child are attending college or another eligible institution, understanding how to use Form 1098-T is essential for maximizing the tax benefits available to you. This guide will walk you through the key details about Form 1098-T, the education tax credits you can claim, and how to avoid common mistakes when filing your taxes.

What is Form 1098-T?

Form 1098-T is issued by eligible educational institutions (such as universities, colleges, and vocational schools) to report qualified tuition and related expenses. It contains the amounts paid for qualified education expenses during the tax year and is used by students and their families to claim education tax credits. The form will include:

• The student’s name, address, and taxpayer identification number (TIN).
• The educational institution’s name, address, and TIN.
• Qualified tuition and fees you’ve paid.
• Any scholarships or grants received by the student.
• Refunds or adjustments made to tuition.

Key Fields on Form 1098-T

1. Box 1: Reports the total amount of qualified tuition and related expenses paid by the student during the tax year.
2. Box 5: Shows the total amount of scholarships or grants the student received.
3. Box 2: Previously reported amounts for billed tuition, but this box was eliminated starting in 2018. Now, only Box 1 is used for reporting qualified tuition.
4. Box 4: Shows any adjustments to tuition or fees previously reported.
5. Box 6: Reports any adjustments to scholarships or grants for the current year.

The form is typically sent to the student by January 31st of the year following the tax year. For example, if you’re filing taxes for the year 2024, you should receive your Form 1098-T by January 31, 2025.

Education Tax Credits: American Opportunity Credit and Lifetime Learning Credit

Form 1098-T is essential for claiming education tax credits. Two key credits that rely on the information provided on this form are:

1. American Opportunity Credit (AOC)

   The AOC is a tax credit that provides up to $2,500 per eligible student for the first four years of postsecondary education. This credit is particularly valuable because it is partially refundable, meaning you can receive up to 40% of the credit (or $1,000) as a refund, even if you don’t owe any taxes.

   To claim the American Opportunity Credit, the student must:

   • Be enrolled in a program that leads to a degree, certificate, or other recognized educational credential.
   • Be in their first four years of postsecondary education.
   • Have no felony drug convictions.
   • Be enrolled at least half-time in a degree program.

   Qualified expenses that can be used to claim the AOC include:

   • Tuition.
   • Required fees.
   • Course materials, such as books, supplies, and equipment required by the institution.

   Box 1 of Form 1098-T will show the amount of tuition and fees you can use to claim the credit.

2. Lifetime Learning Credit (LLC)

   The Lifetime Learning Credit provides up to $2,000 per tax return, and it is available for an unlimited number of years. This credit is nonrefundable, meaning it can reduce the amount of tax you owe but won’t provide a refund if your tax liability is less than the credit.

   To claim the Lifetime Learning Credit, the student must:

   • Be enrolled in an eligible program at an eligible institution.
   • Be enrolled either part-time or full-time.
   • There is no limit on the number of years you can claim the LLC, making it ideal for students who are pursuing graduate courses or taking individual courses for career development.

   The Lifetime Learning Credit covers qualified expenses, including:

   • Tuition.
   • Required fees.
   • Books and supplies if they are required to be purchased directly from the institution.

   Box 1 of Form 1098-T will show the qualified tuition and fees that can be used for the LLC.

How to Claim Education Tax Credits Using Form 1098-T

1. Gather Your Form 1098-T
   Ensure you receive the Form 1098-T from your educational institution. If you don’t receive it by January 31st, reach out to the school for assistance. The form should also be available online through your school’s student portal.

2. Fill Out Your Tax Return
   On your Form 1040, you’ll report the qualified tuition and expenses shown on Form 1098-T. You will use the amounts from Box 1 (tuition paid) and Box 5 (scholarships and grants) to calculate your education tax credits.

3. Choose the Right Credit
   You must choose between the American Opportunity Credit and the Lifetime Learning Credit, but you cannot claim both for the same student in the same year. To determine which credit to claim, consider:

   • The AOC is more beneficial for students in their first four years of college.
   • The LLC is available for part-time students and graduate students and can be used for an unlimited number of years.

4. Use IRS Form 8863
   To claim either credit, you’ll need to fill out Form 8863, Education Credits, and attach it to your Form 1040. This form helps you calculate the amount of the credit you’re eligible to claim and ensures that the credits are applied correctly.

5. Adjust for Scholarships and Grants
   If the student received scholarships or grants, the amounts will be reported on Box 5 of the 1098-T. These amounts reduce the total qualified tuition expenses you can claim for the credits. Make sure to subtract the scholarships and grants from your tuition costs when calculating the credit.

Common Mistakes to Avoid

1. Incorrectly Reporting Amounts
   Always double-check that the amounts you report on your tax return match the figures from Form 1098-T. An error in reporting can lead to delays in processing your return or even trigger an IRS audit.

2. Failing to Account for Scholarships or Grants
   Many students overlook the impact of scholarships or grants. These are reported in Box 5 and must be subtracted from your total qualified tuition to avoid over-claiming the credits.

3. Claiming the Wrong Credit
   Remember, you cannot claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year. Choose the one that provides the greatest benefit based on the student’s education level and the amount of qualified expenses.

4. Missing the Filing Deadline
   Make sure to file your tax return before the deadline to avoid missing out on any credits you’re entitled to. If you file after the deadline, you may miss out on education tax credits that could have lowered your tax liability.

Key Takeaways

• Form 1098-T is essential for claiming education tax credits such as the American Opportunity Credit and the Lifetime Learning Credit.
• Box 1 reports the tuition and fees that you can use to claim the credit, while Box 5 reports scholarships and grants that must be subtracted from your total.
• Be mindful of the rules for both credits, including the number of years you can claim them and the student’s status.
• Use Form 8863 to claim the credits, and ensure all amounts are correctly reported to avoid mistakes.