University has been consistently mis-reporting 1098-T Box 1? (Tuition billing date vs. paid date?)

[manii]

Hello, I graduated college last year in Spring 2022. For all four years of college I got a full-ride scholarship that covered tuition/fees as well as room/board, etc. So this latter part of my scholarship was taxable income.

For simple math, let's say educational expenses were always around 5000 a semester and the taxable portion was around 5000 a semester. So, my for a full year I would have 10,000 paid to the university in payments for tuition and fees, and 20,000 in scholarships (10k of which went directly to me as taxable income).

In 2018, freshman year, I did not file taxes as I had no other income and my scholarship income for one semester fell under the standard deduction -- I didn't bother checking the 1098-T back then. I started filing taxes from tax year 2019 when I started earning other W2 income and my scholarship income grew above the standard deduction. The 1098-T amounts for 2019, 2020, and 2021 all lined up with the expected 10k in box 1 and 20k in box 5.

Come now when I am filing for 2022, expecting the halved amounts to account for just one semester (so 5k in box 1 and 10k in box 5). Instead I see there is zero in box 1 and 10k in box 5. The payments from my scholarship are always made in the same calendar year as the semester. They are billed on the student portal in December of the earlier year, but actually *paid* by my scholarship and credited to my account in January. So I feel like for "qualified educational expenses paid in 2022..." I should be using the date when it is paid from my account, not billed. Is this correct?

Anyway, this sparked some deeper digging and I see that back in 2018, the return does seem to include tuition payments for 2 semesters in box 1. So 2018's box 1 states that 10k was received when I would've expected only 5k. However, box 7 ("Checked if the amount in box 1 includes amounts for an academic period beginning January– March [following year]") is not checked on these 1098-Ts, which is why I didn't realize this earlier.

I would like to just be accurate and claim that I *did* pay 5000 this year in tuition -- the 1098-T contradicts that, but according to my records it doesn't change the tax liability for 2018-2021. The other years I filed taxes are all the correct amount, regardless of which semesters were *technically* being counted under the tuition and scholarship numbers on the 1098-T -- no double counting.

For 2022, it seems unfair that my university is reporting that I got 10,000 in "free money" when in fact half of that went towards paying tuition. The tuition was paid in 2022 and it is reflected as such on my student account portal (it's just billed in December). Is it possible for me to use the 5000 figure as tuition paid? I don't want to trigger an audit or something by doing something wrong, but I feel like if I go along by using the paid date instead of billing date it should all add up, including prior years.

[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. 

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2022 expenses".

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS. 

[Hal_Al]

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.

You may want to consider filing amended 2019, 2020 and 2021 returns to claim the credit. 2019 must be amended before 4-15-23. 

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

[manii]

Thank you for the responses! This is relieving to hear.

I was planning on using that tax "loophole" to claim the education credit, but omitted it from the question for simplicity. I only learned about it last year so I applied it in 2021 as well, but I didn't realize that it's not too late to claim it for 2019 and 2020 as well. I will look into amended returns. Thanks for the tip!

[manii]

Another question -- if I increase my federal income in this way to get the credit, will it also increase my state income and will I have to file a state amendment and owe taxes? If so, I'm afraid that the penalty for not paying all of my state tax up to three years later may be pretty high.

[Hal_Al]

Q. if I increase my federal income in this way to get the credit, will it also increase my state income and will I have to file a state amendment and owe taxes?

A. Yes, almost certainly, depending on state rules.   It would be unusual for a state to exempt scholarship income, although my state (Ohio) does have a limited exception.