1098-T Box 1 less than actually paid?

[fusilli45]

(Hope I can tell this story clearly! All numbers below rounded for simplicity). In the past for each of my children, I had made 2 college tuition payments per year, about $25,000 each for each upcoming semester (one in the summer, one as soon as the bill was produced mid-December for the following spring semester) with withdrawals from a 529 plan. For my daughter’s final semester, spring 2022, the $25,000 bill was due January 16, 2022, I paid on January 6 (I'm now retired with little income, so hoped that paying in 2022 would have tax advantages, and we'd never before claimed any credit such as AOTC). I expected to see this payment reflected on 1098-T Box 1, but instead was puzzled to see only $9000. I noticed that my 2021 1098-T indicated $50,000, but I did not pay that – I only made 1 payment of 25,000 in 2021 because I made the payment for spring 2022 in January. I spoke to someone in the university who said things I didn’t understand, including how my Box 1 amount was “capped” by payments made in previous years and they can ascribe payments to when invoices are produced rather than when they're due or paid. I mentioned that everything I can find online seems to indicate that 1098-T should reflect when payments were validly made.

Anyway, when I enter into TurboTax the 1098-T info, with the $9000 that appears in Box 1, my tax is much higher than it would have been had the value been $25,000 as I expected. But in TurboTax there’s an optional field that says “Enter the tuition paid”, describing that this includes all sources, and if I include the amount I paid in that field the tax is much lower, around what I had expected, including obtaining the AOTC.

Whew! I guess my question is: Was it allowable for the university to indicate amounts on 1098-T that were different from what I actually paid in those years (much higher in 2021, much lower in 2022)? And does the “Enter the tuition paid” field in TurboTax address this correctly and adequately? Or anything else I should be thinking about? Thank you!

[KrisD15]

No, the school is required to post what was PAID in the tax year, NOT what was billed. 

Yes, the link under Box 1 on the 1098-T screen "What if this is not what I paid" is to be used in your situation. 

Just keep a copy of the Student's school account statement with your tax file. 

Report the expenses paid to the school, and if you need to use that link and override what the school reported, you can do that. 

Enter additional expenses not shown on the 1098-T (if applicable) on the additional screens in the education section. 

If you used a 529 distribution, you can apply the distribution to expenses such as Room and Board. This COULD free-up expenses to use for an Education Credit. 

Pub 970 has some great advise and examples  

[Hal_Al · Accepted solution]

Q.  Was it allowable for the university to indicate amounts on 1098-T that were different from what I actually paid in those years (much higher in 2021, much lower in 2022)?

A. No, but it's a common error.  TurboTax accommodates it and you find the accommodation.

Q. And does the “Enter the tuition paid” field in TurboTax address this correctly and adequately?

A. Yes.

A. Or anything else I should be thinking about? 

Q. Maybe. 

You said  "we'd never before claimed any credit such as AOTC". You should have (unless your reason for not doing so is your income is too high) and probably should file amended returns to claim it for past years (the deadline for amending 2019 is 3-15-23). $1000 of the AOTC is refundable, even if you had no tax liability.  You should pay some tax on the 529 distribution (or her scholarship), if needed, in order to claim the AOTC. 

____________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

You have $1120 of taxable income  

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings.