Since I pay my tuition through my church, it shows up on the 1098T as a scholarship. How can I get credit for paying my own tuition?

[b52dream]

Can I claim the tuition as college expenses or a charitable donation to the church that pays my tuition?  What is the correct way?

[MiriamF · Accepted solution]

You can claim a charitable deduction, but not an education credit.

Unless your income exceeds the MAGI for your education credit, you may be better off claiming the education credit than taking a deduction on Schedule A.

However, the way that the 1098-T is written - and the way that your tuition is paid - is painting you into a corner, forcing you to take the deduction rather than the credit. After all, you did pay the church, not the school, and the church did provide the funds to the school on your behalf, which counts as a grant or scholarship.

The American Opportunity Credit, for instance, allows a maximum credit of $2,500, based upon the first $4,000 you spend on your education. If $4,000 is all you spent, then you are much better off claiming a credit for $4,000 in tuition than getting a deduction for $4,000 in donations. If you are in the 25% tax bracket, for instance, you would only get a reduction in tax of $1,000 if you took a deduction for that amount, versus the $2,500 credit. 

On the other hand, if your education cost you $25,000, a $2,500 tax credit would only be 10% of what you spent ($2,500/$25,000 = 10%). If you are in the 25% tax bracket, then a deduction of $25,000 would potentially be worth $6,250 to you (0.25 times $25,000).

If your income exceeds the MAGI for an education credit, you wouldn't get the credit. But you will still get a deduction for your gift to the church, so the deduction would be better in that circumstance.

Which approach is best depends on many factors - the credit, your income, the MAGI limits to get the credit, the amount of your education expenses. You can try different scenarios in TurboTax to see which one would give you the best result. But this info would only help you to determine whether to change your procedure for the future (from paying the church to paying the school directly) rather than for making changes for 2016.

[b52dream]

The best result for me was to claim it as college expense, not a tuition credit since the 1098T limited that.  A charitable deduction would not work because the church had rendered a service for the money I gave them.  The college expense route gave me more refund than others because it gave me a lifelong learning credit.

[MiriamF]

Sounds like you  need to pay the college yourself. That would remove all restrictions. This system does not work for you. The Lifetime Learning Credit will have the same issues as AOC - you paid the church, and the church paid the school. A strict IRS examiner would deny the credit.

[b52dream]

Too late for that.  Paid my last tuition in January.  🙂  Why would it not be a legitimate expense for college like other items listed in that question?  I got AOC and Lifetime credit for college expenses for my daughters in the past, why would that not work for me?  Just curious.  Thanks.

[MiriamF]

Did you use the same procedure for your daughters - paying the church, and the church paid the tuition?

You can try claiming the credit, but the IRS has a copy of your 1098-T, and it says that all of your tuition was paid by scholarship. If you try to explain this arrangement, they will insist that you should claim a deduction for money you gave to the church, or they may deny both the credit and the deduction, for reasons discussed above. Depends on whether they audit you, and if they do, whether the auditor is feeling charitable on that day.