If I teach at a university and receive tuition remission for my kids, how do I enter this? No payment first, just deducted straight from the bill.

[ToddL · Accepted solution]

You don't need to report this benefit on your tax return. The IRS does not require taxation of tuition remission benefits for undergraduate courses, unless the spouse or child is not claimed as a dependent on the employees’ tax return.

(In some cases, there are tax implications for tuition remission benefits. If so, your employer (the school) will report them on your Form W-2 and 1098-T)

For a detailed discussion on this issue see Tuition Remission -- A Tax Free Fringe Benefit, from the National Association of Independent Schools.

[jeldreth070]

am  i eligible for the LLC on what i am billed /pay after the tuition remission benefit is applied?

[RKMarto]

So, follow-up question:  Does the dependent need to report the amount on the 1098-T on his tax return?  I understand it's tax-free, but if we do report it, are we (as married, filing jointly) eligible for the American Opportunity Credit?  We already filed our taxes, but missed this and would hate to miss this credit if we qualify.

[Hal_Al]

If the amount in box 1 of the 1098-T is more than the amount in box 5, you may count the difference in claiming the  American Opportunity Credit (AOC). Books and computers are also usually qualifying expenses for the AOC

If the amount in box 5 of the 1098-T is more than the amount in box 1, the difference is taxable income to the student. If he does not have any taxable scholarship, he does not enter the 1098-T. 

 There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.