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College Tax credit

My wife works at the college our daughter is attending. We had to pay the mandatory fees for the fall semester in 2016 and then the tuition and mandatory fees for the winter term and spring 2017 semesters in 2016 as well. We will be reimbursed for the winter and spring term tuition but not the mandatory fees in 2017.

Box 1  is empty in the 1098-T received we from the College while Box 2 shows an amount ($3457) slightly greater than what we paid for tuition and fees in 2016 ($3187).  My concern is that by entering the amount we paid for tuition and fees into the “Enter the Tuition paid”  section within turbo tax and then claiming the College Tax Credit, the calculated credit amount will be much more than we are really entitled to since we will be getting a check from the college in 2017 for the tuition expenses, but again, not the mandatory fees,  we paid in 2016.

How in turbo tax premier can we claim the college tax credit and then get this applied only to the mandatory fees we paid in 2016? This is our daughters first year in college so this is all new to us.

Thanks for any guidance you can provide.
1 Reply
Level 15

College Tax credit

Basically, I can see you already understand that you the parent's claim the student as your dependent, along with all the education expenses. For the moment, lets put aside the fact that your wife works at the college. For the purposes of taxes and education expenses, deductions and the such, that really doesn't matter.

Where this gets tricky, is based on the fact that colleges work in academic years, while the IRS does not. So the reality is, it takes the student 5 calendar years to get that four year degree. So understand this right off the bat. (You probably do, but I put it out there anyway so we're both on the same page, so-to-speak)

 - Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*
- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

So basically, if there were no out of pocket expenses, you still claim the student as your dependent. No question about that. However, if the student received a check for any excess scholarships, grants, 529 funds or other educational benefits, then it's the student who will report all the education stuff on the student's tax return. That's because the excess is taxable income to the student - not the parent. On top of that, the excess funds are taxed to the student, but at the parent's tax rate. (Ridiculous yes, but that's the law.) On the student's return, any excess education funds not used for qualified education expenses and paid to the student by the college, gets transferred to line 21 of the 1040 with an annotation of "SCH" next to it. That is the amount taxed at the parent's tax rate.

If this is a "break even" scenario where there's no excess funds, (usually because the college held them to apply to the next semester in the next tax year) *OR* if there are out-of pocket expenses paid for qualified education expenses in the tax year being filed, then the parent's report the education stuff on the parent's return.

I've not covered how this will work into the equation for 2017 at this point for two reasons.
 - For your 2016 taxes, it doesn't matter right now at this specific point in time
 - When you are reimbursed (in 2017 I presume) that will be taxable income on your 2017 return. But since you claimed it as an out-of-pocket deductible expense on the 2016 return, you just pay taxes on it in 2017. Unless of course, you use tha reimbursed money to pay additional "out of pocket" qualified education expenses in 2017. Then that basically "cancel's out" it's taxability on the 2017 return. In the end, it all "works out in the wash" so-to-speak.
Good lord! Looking back on what I just typed, I sincerely hope I didn't confuse you.

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