1098-T: Understanding the 1098-T IRS Tax Forms for Students

If you, your spouse or any of your dependents decide to further their educations at a post-secondary school or schools, the learning institutions will send each student a tuition statement known as Form 1098-T after the close of the calendar year. Educational institutions are required to provide these forms to students and to file them with the Internal Revenue Service as well for anyone from whom they’ve received money toward “qualified education expenses.”

What Is Form 1098-T?

The form contains all the information you’ll need to figure out if you qualify for either of the two education tax credits available to taxpayers under the Internal Revenue Code in the 2020 tax year: The American Opportunity Tax Credit and the Lifetime Learning Credit. In fact, you generally can’t claim the credits if you don’t receive a Form 1098-T.

The form is sent to the student, not necessarily to their parents, although some institutions make the form accessible online in a student account. The student gets credit on the 1098-T form for paying for school, even if mom and dad are doing so. But that’s generally OK because parents can claim these tax credits for their dependents, and students can't claim them if their parents can claim them as dependents on their tax return.

What Are "Qualified Education Expenses?"

Eligibility for the American Opportunity Tax Credit and the Lifetime Learning Credit begins with a student’s qualified expenses. These generally include tuition, course materials and fees that are required for attendance.

Qualified expenses do not include:

  • Insurance 
  • Student health fees 
  • Transportation expenses 
  • Living expenses like room and board or that apartment you rent for your child nearby campus 
  • Money you might have spent on sports or hobby courses, unless those courses are required to earn a degree or to “acquire or improve job skills”
  • Any expenses that you paid with tax-free educational assistance

It’s up to the school how it wants to report qualified expenses on Form 1098-T. Learning institutions have the option of reporting the amount it billed to the student, or they can report how much the student actually paid. It depends on the accounting and reporting system each school uses.

What Is an Eligible Institution?

The school you or your dependents attend must also qualify for these education tax credits. An “eligible institution” is one that can or does participate in federal student aid programs – which is pretty much most colleges and universities. Some vocational schools qualify, too.

You can look up your school on the U.S. Federal Student Aid Code List that's available online if you're unsure. If it’s there, it’s eligible. You can also check with FAFSA.gov to see if it has a federal school code.

The American Opportunity Tax Credit

So what do you get if your expenses and school qualify? The American Opportunity Tax Credit is equal to up to $2,500 of the first $4,000 you pay toward qualified expenses. The calculation works out to 100 percent of the first $2,000 you spend and 25 percent of the next $2,000 you spend.

Eligible students have to attend school at least half-time for at least one academic period during the year and they must be pursuing a degree or similar credential. The AOTC is limited to the first four years of college after high school, and you can only claim the credit in four tax years.

The student cannot have a federal or state felony drug arrest on his record.

The Lifetime Learning Tax Credit

The Lifetime Learning Credit maxes out at $2,000, or 20 percent of the first $10,000 you spend on qualified education costs per student. It’s a bit more flexible than the AOTC in that it’s not limited to just the first four years of post-secondary education, and the student doesn’t have to attend at least half-time. They need only attend for one academic period, such as a semester, that begins during the calendar tax year.

Comparing the Credits

Books and equipment only count toward the LLC if the expense is paid directly to the school, but the AOTC rules are less stringent in this respect, always assuming that the books and equipment are required for attendance. You can buy these things elsewhere if you want to.

And here’s a big difference – the AOTC is partially refundable. This means that if some of the credit is left over after it erases any tax you might owe the IRS when you complete your tax return, you can receive 40 percent, up to $1,000, as a tax refund. Not so with the LLC. After the LLC eliminates your tax debt, the IRS effectively gets to keep the balance, if any.

Income Phaseouts

Both tax credits are subject to income phaseouts. The amount of your tax credit will gradually decrease until your income reaches a cap beyond which you can’t claim the credits at all if you earn more than a certain threshold.

These limits are based on your modified adjusted gross income, which is your adjusted gross income with any foreign earned income exclusion, foreign housing exclusion or foreign housing deduction added back in. In other words, most taxpayers will find that their MAGI is the same as their adjusted gross income or AGI, at least for purposes of claiming the AOTC and LLC. Different tax benefits have different MAGI calculations.

As of the 2020 tax year – the return you'll file in 2021 – the AOTC begins phasing out at MAGIs of $80,000, or $160,000 if you’re married filing jointly. You can’t claim the AOTC at all if your MAGI is more than $90,000 for single filers, or more than $180,000 if you’re married filing jointly.

Phaseouts for the LLC for the 2020 tax year begin at $58,000 for single filers and $116,000 for married filers of joint returns, and those with MAGIs of more than $68,000 for single filers, or $136,000 for married joint filers, can’t claim this credit at all.

Breaking Down IRS Form 1098-T

That 1098-T you receive will contain all the necessary information for claiming either tax credit. There are quite a few boxes on this tax form, but some are more important to you than others.

  • Box 1 tells you the total of all payments received by the school for qualifying expenses.
  • Box 4 indicates the amount of any reimbursements or refunds you received for the current year and going back to 2003. 
  • Box 5 indicates whether the student received any scholarships or grants that were paid to the school and, if so, how much. These amounts have to be subtracted from what was paid on behalf of your student. You can’t claim a tax credit for money another entity spent.
  • Box 6 is similar to Box 4, but it reports reimbursements or refunds made from scholarships or grants in years 2003 or later. 
  • Box 7 reports if any of the total entered in Box 1 is related to expenses attributable to the January through March 2021 semester.
  • Box 8 indicates whether the student attended at least half-time.
  • Box 9 indicates whether they were enrolled in a graduate program. 

How to Claim One or Both Education Tax Credits

Claiming either of these tax credits is a relatively simple matter of completing Form 8863 and submitting it with your income tax return. Claiming the AOTC requires that you report the school’s Employer Identification Number on the form.

Tips

  • You can’t claim both the LLC and the AOTC for the same student and expenses – that would be double dipping – but if you have more than one learner in the family, you can claim an AOTC for one student and another AOTC for another, assuming they both qualify.

The LLC is a collective type of credit – it’s based on a percentage of all your expenses for all students in your family. You can add these fees and qualified tuition costs together to get to the max of $10,000, then deduct the 20 percent if your income qualifies for the full amount of the credit.

But you can’t also claim the AOTC for those students whose expenses you included if you do this. You can claim the LLC on the first $10,000 and apply the $2,500 to the AOTC for the other student, however, if you have $12,500 in overall expenses and one student incurred $2,500 of that.

One Last Caveat

You can’t claim either of these tax credits if you file a separate married return. You can refer to IRS Publication 970 if you have more specific questions, or consult with a professional tax preparer.