December 1, 2016 – In accordance with the Protecting Americans From Tax Hikes (PATH) Act, for 2016 every educational institution was required to provide a Form 1098-T (Tuition Statement) to those attending their institution. The Form 1098-T provides information related to tuition and fees that the taxpayer or taxpayer’s dependent would use to determine their applicable educational deduction, American Opportunity Credit, or the Lifetime Learning Credit.
Bumps in the road in 2016
However, for several institutions, compliance with these reporting requirements were very problematic. Accounting software utilized by these institutions was not originally designed to comply with the new IRS reporting requirements. Thus, reporting issues related to undesignated payments and reimbursements, inability to allocate student payments to specified expenses and netting amounts billed or paid were inconsistent among institutions for 2016. The intent of Congress was for Taxpayers to only take the tax credits or deductions based on qualified expenses actually paid, not billed. Thus, given the complexity and reporting issue the IRS did not impose penalties in regards to the amounts reported on Form 1098-T for 2016.
Consider timing your payments in order to take advantage of potential educational deductions and credits.
Expectation for 2017
Thus, for 2017, it’s expected that the IRS will assess penalties for non-compliance. Therefore, we fully expect educational institutions will be making every effort to comply with the PATH Act requirements and report only amounts actually paid in 2017 for qualified expenses. As a result, calculating these credits and deductions will be more accurate in 2017. As a taxpayer, consideration should be given to the timing of your payments in order to take advantage of potential educational deductions and credits.
Tax planning considerations
As your tax preparer, consideration is given to the strategic use of these educational expenses and credits. For example, the American Opportunity Credit and Lifetime Learning Credit are phased out based on your filing status and modified adjusted gross income. If the taxpayer is eligible for either credit but has been phased-out, the dependent may be able to utilize the tax credit if he or she has a tax liability. If the dependent is subject to the kiddie tax, he or she may not claim the credit.
This is just one example of strategic actions to maximize the taxpayer and their dependents’ tax credits.
How Dopkins can help
If it sounds like a lot of mumbo jumbo, rest assured that the Dopkins Tax Advisory Group is all over this. Contact Brian Dansa at firstname.lastname@example.org or your Dopkins Tax Advisor with questions about how this affects you and /or your dependents and your tax planning.
About the Author
Brian T. Dansa CPA
Brian is a Senior Associate in the Tax Advisory Group. He provides tax compliance services for both businesses and individuals.