The learning curve: IRS proposes rules changes for tuition and related expense reporting requirements

The IRS rules governing how tuition and related expenses are reported and the basis for several educational tax credits may, could – or will - be changing, depending on the outcome of proposed new rules. The probability of students and their families not being affected by the proposed changes is about the same as a politician not making campaign promises. The IRS doesn’t go to this effort to not make alterations.

The PATH (Protecting Americans from Tax Hikes) Act of 2015 and 2015’s Trade Preferences Extension Act of 2015 are causing consideration of changes in how some types of educational outlays are reported, which impacts educational tax credit-claiming taxpayers and educational institutions as well.

The rules deal with the reporting of information under tax code section 6050S, and specifically Form 1098-T, also known as the “Tuition Statement." Three different credits or deductions will be when the final rules, as proposed, go into effect. These are, presented in the order of most favorable to least favorable:

  • American Opportunity Tax Credit (AOTC): The AOTC is in play for the first four years of higher education. The maximum annual credit is $2,500 per eligible student; however, if invoking the credit means no taxes are owed, another 40 percent of any remaining amount of the credit (up to $1,000) is potentially refundable to the taxpayer (the AOTC, formerly temporary, was made permanent under PATH Act).
  • Lifetime Learning Credit (LTLC): Up to $2,000 may be claimed as a credit. Directly reducing  your tax liability. Unlike the AOTC, which allows $2,500 per eligible student each year, only one $2,000 credit per year, per taxpayer is allowed with the LTLC.
  • Sec. 222 deduction for tuition and related expenses: For individuals, the deduction matches the same tax-year tuition and related expenses qualified paid by the taxpayer, again assuming they’re qualified (the PATH Act continued this deduction for tax years that begin after Dec. 31, 2014 and end by Dec. 31, 2016).

So what exactly did the PATH  Act change? It added an additional burden on higher educational institutions to report tuition and fees actually paid during a year, as opposed to what was billed, and requires these institutions to segregate out payments made in one year that are actually prepayments of the next year’s tuition and fees. Additionally, colleges and universities must report the number of months during a year that a student was a full time student during the year.

Because existing IRS regulations now don’t match up exactly with the legislatively-wrought changes, the new regulations are being offered up for public comment. The new regulations will, among many other things, tighten a taxpayer’s requirements for reporting tuition and other related expenses paid in one tax year (for example, 2015), that are reported in the first quarter of 2016. This is the “prepayment rule.”  The rule the IRS is proposing stipulates that whatever amount falls under the prepayment rule must be included on the Form 1098-T.

Always on the lookout for fraud or just tax return truth-stretching, the IRS also wants educational institutions to pony up information that includes the dates during which a student is identified as a full-time student and actually on campus and in class as stated. Comparing this information to other data will enable the IRS to identify, it apparently believes, actual full-time students from taxpayers simply seeking a claimed dependent tax advantage.

Here is the entire (and lengthy) “notice of proposed rulemaking and notice of public hearing.” All comments must be received within 90 days of the publication in the Federal Registry of the proposed rules, and the clock on that started ticking on Aug. 2, 2016. The contact information for comments is found at the top of the second page. Happy reading.


Tagged IRS, PATH Act, Form 1098-T