Are the expenses used in calculating the American Opportunity Credit based on the date of the charge, date of the classes, or the date of the payment?

[kevinlrak]

I often used payment plans to pay for my college expenses, and therefore would sometimes, for example, pay for the last bit of the 2015 year in the beginning of 2016. Similarly, the charges for the spring semester would sometime be charged before January first. So my question is as stated in the title:

Are the expenses used in calculating the American Opportunity Credit based on the date of the charge, date of the classes, or the date of the payment?

While doing the TurboTax Ammend process for 2015, if you click the "Learn More" link on the "Was any of the scholarship income not designated to pay 2015 education expenses?" field you get the following message:

"Scholarship Income Not Allocable to 2015

Scholarship income must reduce qualified education expenses for each period of study that assistance is allocable to. However, sometimes scholarship income is not received at the same time education expenses were paid. This can cause your scholarship income to be overstated in one year and then understated in another year. If you received scholarships or grants in 2015 for expenses reported in a year other than the current year, enter an amount here to reduce your scholarship income amount. You will need to include that same amount as scholarship income in the tax year in which the education expenses are actually reported.

For example, in 2014 you received a 1098-T with $4,000 for your fall 2014 expenses which you reported on your 2014 tax return. In 2015 you received a 1098-T that included tuition expenses of $6,000 and $10,000 of scholarship income. $4,000 of the scholarship was actually for your 2014 expenses. You will enter $4,000 here to reduce your scholarship income to $6,000 for 2015. You may also need to recapture any education credit or deduction taken in 2014 that would have been disallowed in 2014 due to the additional $4,000 of scholarship income allocable to 2014 education expenses."

This makes it sound like (for scholarships at least) what matters is not when the money changed hands, but rather the school term to which the money is allocated. Is this unique to scholarships? Or is it the same for all of the expenses and payments?

The answer to this will make a big difference for me because of the fact that I used payment plans and often payed a significant portion of my expenses after the term was over.

[rjs · Accepted solution]

You can only claim the American Opportunity Credit for payments you made in the year that you are claiming it for. On your 2016 tax return, you can only claim the credit for amounts that you paid in 2016. The billing date doesn't matter. It's when you actually paid that matters. However, the date of the classes matters, too. You can only claim the credit for amounts you paid for classes that start in the same year, or in the first 3 months of the following year. So if you paid at the end of 2015 for the spring 2016 semester, you can use that payment for the credit on your 2015 tax return. But amounts you paid in 2016 for classes that began in 2015 cannot be used for the credit at all, in any year.

[kevinlrak]

Some of what you said makes sense, but some of it seems very counter-intuitive. Maybe someone else can clarify some of what you said. The TurboTax statement I quoted about the scholarships makes sense, why would everything else be different from that?

[kevinlrak]

Specifically: "But amounts you paid in 2016 for classes that began in 2015 cannot be used for the credit at all, in any year." doesn't make sense. Why would paying for my fall classes in January (right after the fall semester) as per my payment plan make them completely ineligible for the tax credit? That doesn't make any sense.

[rjs]

Making sense is not a requirement for tax laws. Here's what IRS Publication 970 says (on page 12) about expenses that qualify for the American Opportunity Credit for 2016.

"The credit is allowed for adjusted qualified education expenses paid in 2016 for an academic period beginning in 2016 or beginning in the first 3 months of 2017."

[kevinlrak]

Wow. Ok. Thank you so much! That is certainly definitive and leaves no room for ambiguity at least. And that's exactly what I was looking for: removal of the confusion. Thanks again rjs!