Employer paid education using vouchers

[rawnblade7]

Hi everyone, I'm hoping to get some help here. I'm a bit frazzled and unsure on how to enter this situation into TurboTax. I'll try my best explaining the scenario.

My employer pays for the tuition for my graduate program. What happens is at the beginning of each term, the school provides me with a balance, and my employer provides the school with a voucher that is a promise to pay if I meet a certain letter grade. At the end of the course, assuming I got a B, my employer will pay the school directly and then add that amount to next paycheck and tax me for anything over the tax-free $5250. 

So for 2020, I took 4 quarters which cost $6000 each. So on my 1098-T box 1 shows $24,000. The problem is that box 5 also shows $24,000. Because my employer initially provides a voucher and does not make payment until the quarter has completed, they only paid $18,000, and I have paid $12,750 in taxes (first $5,250 was tax free) during 2020. I believe the school's records consider the voucher as payment, because once it is received, my balance is reduced. Should I enter Box 5 into TurboTax using $18,000 since my employer records show that was the amount paid? Seems like if I leave it at $24,000 I'll be paying taxes that I shouldn't be paying.

So when it comes to inputting into TurboTax, I put in the 1098-T information and also stated that the actual tuition paid was $18,000. The next question asks me "Did I receive any of the following tax-free benefits last year? ex. Tax-free employer provided assistance". Should the answer be yes or no? and if the answer is yes, it asks what portion of the $24,000 from box 5 on my 1098-T is from tax-free employer provided assistance. Should the answer be $5250? 

The next question is "was any of the financial aid already included as income?" I take it this answer should be Yes, but I'm not sure about the amount. It asks "How much of the $24,000 received in aid was already reported on the W-2. I believe I should put in $12,750 for this box since that was the taxable amount added to my income, but I'm just asking to double check. 

Thanks in advance,

Andrew

[Hal_Al · Accepted solution]

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. You claim the tuition credit  based on your own financial records, not the 1098-T.  Since the tuition was mostly paid with taxable  reimbursement (for tax purposes, YOUR money), you may use it to claim the tuition credit. 

If you claim the tuition credit, you do need to report that you got a 1098-T.

When you enter the 1098-T in TurboTax (TT), leave box 5 blank.  Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.  When asked if you got Tax-free employer provided assistance,  answer  yes and enter only $5250. 

You state that 1098-T box 1 shows $24,000 but your employer  only paid $18,000.  When you enter the 1098-T, in TT, enter only $18,000 in box 1. At the 1098-T screen, in TT, note the link "What if this is not what I paid the school".  You can change it using that link or just enter the right amount in box 1. 

[Opus 17 · Accepted solution]

For purposes of education tax credits, in 2020, you "paid" $12,750 in qualified expenses, since that is the amount that you were taxed on.  (It's as if your employer gave you a $12,750 raise, then sent the money directly to the school, and you still pay the taxes on that raise.)

[Carl]

@Hal_Al I don't know if this is still true for the 2020 taxes, or if it will remain true for the 2021 taxes. But I seem to recall that if you tell the program you don't have a 1098-T, then there's a number of credits the program will not allow you to take. Again, not sure on that. But figured I put it out there so you can check. My kids have been out of college since 2009 and a lots changed since then. Therefore, I really have nothing to check it with.

[Opus 17]

@Carl 

The school must issue a 1098-T before you can qualify for any tax benefits.  But the form itself doesn’t get sent with the tax return (presumably the IRS does computer matching later) and if the figures on the form are wrong you can substitute your own.  In this case, the school received $18,000 but the taxpayer is only considered to have paid $12,750.  

[rawnblade7]

Thanks for the explanation! I think I'm all set and I understand what TurboTax is doing behind the scenes based on those questions. I didn't realize there are Education Credits (American Opportunity Credit and Lifetime Learning Credit) so that is definitely an added bonus. Thanks! 

[rawnblade7]

Thanks for the explanation! That's a great way of explaining what's happening in my situation. 

[Hal_Al]

@Carl  After telling TT you don't have a 1098-T, you have to tell it you qualify for an exception to get a credit or TFD.  

From the form 8917 instructions:

"However, a taxpayer may claim one of these education
benefits if the student doesn’t receive a Form 1098-T because
the student’s educational institution isn’t required to send a
Form 1098-T to the student under existing rules (for example, if
the student is a nonresident alien, has qualified education
expenses paid entirely with scholarships, or has qualified
education expenses paid under a formal billing arrangement). If a
student’s educational institution isn’t required to provide a Form
1098-T to the student, a taxpayer may claim one of these
education benefits without a Form 1098-T if the taxpayer
otherwise qualifies, can demonstrate that the taxpayer (or a
dependent) was enrolled at an eligible educational institution,
and can substantiate the payment of qualified tuition and related
expenses."