1098-T question

You have discovered that Form 1098-T is not worth the paper it is printed on. Every student I train to prepare tax returns is told that the 1098-T is worthless for documenting qualified higher education expenses. First off, many schools enter an amount in Box 2, that represents billing. Tax benefits for education are based on unreimbursed amounts you spend, not what is billed. In many cases (maybe most cases), the amount in Box 5 (Scholarships or grants) does not reflect the amount received. Even, if there is an amount in Box 1 (payments received), it is sometimes wrong or if right, still does not include other expenses that qualify for a tax benefit.

Therefore, the only way to accurately compute any tax benefit for higher education, is to collect the amount of tuition and fees that were paid in the year to attend college or take a class. If the taxpayer is going to use the American Opportunity Tax Credit, I then ask for the amount expended on books, supplies and equipment that were required for either attendance at school or to take a class. If the taxpayer is using one of the other higher education benefits, I ask for the amount expended for books, supplies and equipment that the school required the student to buy "only from the school" in order to attend or take a class. I remind the person that any amounts they borrowed and spent on qualified expenses also count even if the loan proceeds were sent directly to the school. Lastly, I ask if there were any scholarships or grants that were received to offset the above named expenses in order to arrive at the net amount eligible for a tax benefit. If the amount of scholarships or grants exceeded the above mentioned expenses, I tell the person that the student will have taxable income equal to any excess.

Hi - this is our first time with both a 529 plan withdrawal along with the 1098-T...

Like so many others - we have the double paper trail problem with the 529 (1099-Q) and 1098-T going to our son's SSN and all the actually payments flowing from our checking accounts.

-- Just started thinking about how to handle our 529 usage, with what appears different scenarios for deductions. After entering some info - will let TurboTax try to figure it out.

He has now received a 1099-Q for the $11k cost basis + $2k earnings.

HE paid $3k for housing, books, etc from his checking acct. WE paid tuition of $12k from our checking acct and he received a 1098-T from the college for his SSN.

SO - all the transactions don't really do anything for him on his 1040... How do we report the funds paid on ours and use the various edu deductions ?

Is he your dependent? If he is, all the educational benefits flow to your tax return. It doesn't matter that the documents may be in his SSN or that he paid the tuition. You add up the qualified expenses paid out of pocket (net of tax-free assistance) and compare that to the amount received from the 529 plan. Expenses for room and board are eligible under a 529 plan, but only to the extent that the amount paid does not exceed the larger of the school's room & board allowance for the academic period and the student's living arrangement or the amount charged by the school if he is living in school owned or school operated housing. If the amount spent exceeds the amount received, the earnings are all tax-free. Room and board are not eligible expenses under the other higher ed tax benefits.

See IRS Pub 970 starting on page 55 fro more details. This pub also includes the rules for coordinating this benefit with American Opportunity & Lifetime Learning Credits and the tuition and fess deduction.

tnx - Since it looks like we'll have some snow for awhile here in the Chicago area, I guess I'll play with TurboTax and see which of the alternatives it picks.

yes - he is claimed as a dependent.....

Just filled in some basic data with TurboTax 2010, along with the 1098-T info... about $12k in tuition...

TT took the American Opportunity Credit vs the other two options. it said the "credit" was better than the "deduction" - resulting in less taxes

American Opportunity CREDIT - $2500 Lifetime CREDIT - $2000 Tuition DEDUCTION - $4000