Switched Keys

With several tax law changes to education credit requirements over the past two years, the IRS regulations have become outdated. One of the changes requires that taxpayers have received a 1098-T in order to claim the credit, although currents regulations do not always require institutions to provide that form to taxpayers. The proposed regulations primarily addresses that inconsistency.

I wrote about this in a blog post Education Credit Alert, and sent letters to the IRS to encourage changing the regulations. More than a year passed since that alert and then last month the IRS released proposed regulations amending sections related to education credits and reporting requirements. Comments are being received until October 31 and a public hearing is not scheduled until November 30, so changes may not be final until into 2017. However, buried in the middle of the proposal is a section that taxpayers and preparers can rely on if the regulations do not become final before the next tax year. 

Until the proposed regulations under §§ 1.25A–1(f) and 1.6050S–1(a) are published in the Federal Register as final regulations, a taxpayer (or the taxpayer’s dependent) (other than a non-resident alien) who does not receive a Form 1098–T because its institution is exempt from furnishing a Form 1098–T under current § 1.6050S–1(a)(2) may claim an education tax credit under section 25A(a) if the taxpayer (1) is otherwise qualified, (2) can demonstrate that the taxpayer (or the taxpayer’s dependent) was enrolled at an eligible educational institution, and (3) can substantiate the payment of qualified tuition and related expenses. 

This essentially reverses the requirement for a 1098-T until the regulations become final. Since the 1098-T requirement does not become effective until 2017, this apparently anticipates that the regulations will not be final before then. This is a benefit to taxpayers, but only partially alleviates the issues with selective 1098-T reporting. If a taxpayer does not receive a 1098-T they may not be aware of the benefits of a tax credit. Still, preparers can be vigilant about advising clients about education credits. 

Regulations affected include 25A and 6050S. Similar changes are proposed for Section 222 (Tuition Deduction). The basic changes proposed by the IRS include:

Section 25A

1098-T Requirement

Requires that the student has received a 1098-T statement from the institution in order to claim a credit. The amounts to claim however, are not limited to the amounts reported. Other qualifying expenses can be included. Provides exceptions to the 1098T requirement. The 1098T is not required if it is not received by Jan 31 and 

• the taxpayer has requested the form, and
• has cooperated with the institution by providing necessary information.

The proposed regulations do not, however, provide an exception if  only non-institutional payments have been made in the three months year prior to a qualifying tax year.

TIN effective

The proposed regulations also include the requirement that the taxpayer must have had a valid TIN for the tax year the credit was being claimed. This requirement primarily affects the ability to claim credits on an amended return following the receipt of a TIN.

EIN required

Taxpayers must now provide the EIN of the institution when claiming the credits. This is an expansion of the previous requirement that taxpayers provide the EIN if they received a 1098-T. Since the proposal enables all students to receive a 1098-T, this is not an additional a burden. This also will help track and analyse education credit claims.

Section 6050S

The biggest change in education credit regulations is in changes to Section 6050S. While the other modifications are in response to congressional action, this changes the institutional requirements to make those congressional changes practical.

The proposed regulations eliminate three of the four exceptions to reporting of education expenses. Previously many students did not receive a 1098-T because their financial aid covered all of their expenses. That is the biggest change. Institutions will no longer have the option of providing information with respect to

• courses for which no academic credit is awarded
• qualified tuition and related expenses are paid entirely with scholarships under
• qualified tuition and related expenses are paid under a formal billing arrangement  

Institutions still have the option of not reporting for non-credit courses. 

Amounts paid

The regulations will also include the change in law that requires institutions to report paid amounts with no options to report amounts billed during the tax year.

Timing

With the proposed regulations coming at such a late date, it is unlikely that they will be effective for the 2017 tax year, and just as unlikely that institutions can change their processes to provide universal 1098-Ts. As a result preparers can rely on the exception buried in the middle of the proposed regulations to submit education credit claims under the old rules.

Congressional Intent

The intent of the law to require the 1098-T in order to claim the education credit was to likely alleviate excess payments due to possible fraud and to save the government money.  I suspect the reverse will be true. Many taxpayers presume they do not qualify for education credits because they did not receive a 1098-T so they don't even try claim it. With a knowledge of current regulations and scholarship inclusion, many more taxpayers will be able to claim that credit. Cost analysis takes years so we may not see the additional cost until 2020. At one point I suspect the law will be changed to limit scholarship inclusion, and possibly require that taxpayers allocate scholarship to qualifying expenses first. Many people believe that's already a requirement.

P. S. There is one drawback of all taxpayers receiving a 1098-T. Whether or not a student receives a 1098-T, the excess of scholarships and grants over  expenses is taxable income to the student. In the past, students conveniently forgot about their education if they did not receive a 1098-T. For most people it won't be a burden. For a few, it will be an unpleasant surprise.