One thing that can really confuse people is the fact that the IRS works in calendar years, and educational institutions do *not*. Educational institutions work in academic years. So the reality is, it takes you five calendar years to get that four year degree. It was when my daughter started her 2nd academic year in college that the light bulb clicked on over my head and I was able to see how the IRS has really simplified it.
- Qualified education expenses are claimed deducted in the tax year they are paid. It *does* *not* *matter* what year was paid *for*.
- Scholarships, grants, and 529 distributions are reported in the tax year they are received. It *does* *not* *matter* what year the scholarship, grant, or 529 distribution is *for*.
Now with it taking five calendar years to get that four year degree, here's where most people screw up.
The last semester of the senior year starts in the *fifth* calendar year. So if you wait until after the new year preceeding that semester to pay for tuition, books and lab fees, you may not get the AOC and other credits that are limited to four calendar years, if you took those credits in the preceeding four calendar years. Here's a rundown.
- Start freshman year fall semester in Sep 2015 and paid fall semester only. For 2015 you claim the AOC. That's one calendar year.
- Start freshman year Spring semester in Jan 2016. Pay spring semester in 2016. Start Sophomore fall semester in Sep 2016 and pay that semester in 2016. That's the 2nd calendar year.
- Start sophomore spring semester in Jan 2017. Pay spring semester in 2017. Start junior fall semester in 2017. Pay in 2017. That the 3rd calendar year.
- Start junior spring semester in Jan 2018 pay in 2018. Start senior fall semester in Septemper 2018. Pay spring semester in 2018. That's the fourth calendar year.
- Start senior spring semester in Jan 2019. Pay spring semester in 2019. Graduate in May 2019. That's the 5th calendar year and you can not claim the AOC or any other 4-year credits if you claimed them the previous 4 calendar years.
So the trick is, pay for the senior spring semester in full, *BEFORE* you go on Christmas break at the end of the senior fall semester. That way, you claim all your education expenses for that final year of college, for the tax year that the senior fall semester ends before Christmas. Then you will have "NO" education expenses to claim for the final semester of the senior year and you got the AOC and other limited credits the first four calendar years.
*ADDITIONALLY* if you do have any unforseen qualified expenses come up during that final senior semester and pay them out of pocket, then you would still qualify for the Lifetime Learning Credit. If paid with 529 funds, then the 529 distribution would just not be taxable is all.
