Claiming an Education Tax Credit or Deduction Now Requires a Form 1098-T—with Some Exceptions

Individuals planning to claim education credits or deductions for 2016 should be aware of proposed regulations issued by the IRS to implement recent law changes.

Unless an exception applies, no education tax credit (the American Opportunities Tax Credit or Lifetime Learning Credit) or deduction will be allowed unless the taxpayer (or his or her dependent) received a Form 1098-T. Taxpayers who haven’t received a Form 1098-T by January 31 may still take a credit or deduction, but only if the student has cooperated fully with the institution’s efforts to obtain information necessary to furnish the statement, including their Social Security number.

As part of the implementation, returns filed for years beginning after 2015 must include the eligible education institution’s employer identification number to which qualified tuition and related expenses were paid.

This program to regulate education credits and deductions is the latest in a series of actions by the IRS to crack down on the widely publicized abuse of education credits and deductions. Here are two reports from the US Treasury Inspector General for Tax Administration (TIGTA) on the topic:

For 2016 and 2017, eligible institutions are required to report tuition and fees paid, rather than billed; previously, either method was allowed. Many institutions won’t be ready to implement this change, so the IRS has stated they won’t assess penalties on Forms 1098-T filed that report billed rather than paid for the 2016 and 2017 years only. We’re anticipating the IRS will have an automatic matching program in the future resulting in notices to Form 1040 filers who don’t have a Form 1098-T on file, resulting in reduced refunds or unexpected tax due notices.

Institutions issuing Forms 1098-T should be aware of the potential for notices, which could be issued to parents or students as early as spring 2017, and form a communication plan and central point to address questions. Additionally, institutions might consider including additional information warning students of the upcoming program when they send the 2016 Forms 1098-T to them. For help navigating these new forms, contact your Moss Adams professional.