Paid tuition out of pocket then was approved for financial aid. Received a 1098T. What do I do know?

[marcyg]

I originally paid for my daughter's college tuition & books in 2017 as she did not qualify for financial aid with mine and my husbands combined income. My husband and I are separated so we filed a waiver with the college and she is now approved to receive financial aid (Pell, BOGG & Cal Grant) based on my income alone. We have requested a refund from the school for fees already paid but were told it would take approximately 6 weeks to receive. We received a 1098 T for tax purposes. My question is this, will I get an amended 1098 T from the school in order to file my 2017 taxes, do I use the 1098 T that I already have to file taxes and if so, will the school then send out a new form in 2018 with the corrections? Or do I not claim her school expenses at all since they will be reimbursed??

[MarilynG · Accepted solution]

The purpose of the Education Credit is to help you with 'out of pocket' expenses you paid for education.  Since you paid these expenses in 2017, you could claim them on your return.

If your 1098-T shows an amount in Box 1 or Box 2 for Tuition, and no entry in Box 5 for Scholarships, entering it basically says that you paid the tuition amount shown.

Don't forget to add in Additional Expenses for books or required fees.  

Next year you may receive a 1098-T showing Box 5 with a higher amount than Box 1 or Box 2, and you would then not have expenses to claim.

Click the link for more info on the 1098-T you may find helpful. 

[Hal_Al]

 The 1098-T is only any informational document. The numbers on it are not required to be entered onto your tax return. If you claim the tuition credit, you do need to report that you got one. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or deduction or possibly have taxable scholarship income. You claim the tuition credit, or report scholarship income, based on your own financial records. Unfortunately that sometimes means working around the 1098-T and the TurboTax interview.

As, TurboTaxMarilynG suggested,  you can and should claim the tuition credit or 2017. You may have to deal with reporting some of the scholarship as income, on your child's return, next year. But that's a good thing. The tuition credit is much more generous than the small amount of tax a student pays.

You will not get a corrected 1098-T from the school. The 2017 scholarship will, most likely, be reported on the 2018 1098-T. You'll have to do some bookkeeping to keep track of the money. You are not locked in to what's on the 1098-T.

It gets even better. There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 2. 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.

[JWJohnson94]

Hello, I had a quick question about the financial aid. 

Did you pay out of pocket and then get accepted for financial aid?

If so how did the financial aid compensate you?

I am in a similar sittuation.

Thanks!

[Hal_Al]

@JWJohnson94  -  It's basically optional  (See the  above reply about the "loop hole").  You can consider the aid (scholarship) as reimbursement for your out of pocket  expense. For tax purposes, it's  a wash.   Or, you can consider the scholarship as income;  in which case your out of pocket costs are eligible for the tuition credit.

If the "aid" is a loan, rather than a grant or scholarship, then you are eligible for the tuition credit, regardless of where the money came from.  Loans are  considered as "your money", since they have to be paid back, eventually.

[Carl]

" Loans are "your money", since they have to be paid back, eventually."

That's misleading the way it's worded. Borrowed money is not your money. Never was, is not now and never will be. Nothing becomes "yours" until you go out and physically earn the money and repay it.