1098-T Includes Paid Tuition for a Course that was not Required for the Degree Program

Q. Since Fall 2020 was paid in January 2021, it was included in 2021 1098-T.  Do I include in 2021 the cost of books paid in 2020 for Fall 2020?

A.  No.  To qualify, expenses must be paid in the year they occur. Exception: you may pay for spring 2022 course in 2021 and count it for 2021.

Q.  Box 1 also included payment for a course that was not required for the degree program.  Does the amount in Box 1 need to be reduced by the course that was not required for the degree program before filing 1040?

A.  No, You may count that money because the student was a degree candidate even if the course wasn't.

Q. Fall 2021 tuition paid with check since I loss grants because of grades.  There was enough grant money so will the grant money go towards the Fall 2021 tuition?

A.  The general answer is yes.  But it's somewhat optional. See "loop hole" below.

There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.