What Education Credit Should You Claim Using a 1098-T Form?

When it comes to reducing the cost of higher education, tax credits can provide significant financial relief. The 1098-T form is central to this process, offering the information needed to claim these educational credits on your tax return.

Choosing the right credit is key to maximizing savings and avoiding errors. Let’s break down how to make informed decisions about claiming education credits using the 1098-T form.

American Opportunity Credit

The American Opportunity Credit (AOC) helps students and families manage the cost of higher education. Available for the first four years of post-secondary education, it offers up to $2,500 per eligible student. To qualify, students must be enrolled at least half-time in a program leading to a degree or recognized credential. The credit covers tuition, fees, and course materials.

A major benefit of the AOC is its partially refundable nature—up to 40%, or $1,000, can be refunded even if no taxes are owed. This is especially helpful for low-income families with educational expenses but no tax liability. However, the credit phases out for taxpayers with modified adjusted gross incomes (MAGI) over $80,000 for single filers and $160,000 for joint filers as of 2024.

To maximize the AOC, taxpayers should maintain detailed records of qualifying expenses, including receipts. Coordination with other educational benefits, like scholarships, is crucial to avoid claiming expenses covered by tax-free aid. Double-dipping is prohibited and can lead to penalties.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is another option for offsetting education costs. Unlike the AOC, the LLC is not limited to the first four years of college and is available for undergraduate, graduate, and professional degree courses, as well as job skill training. This makes the LLC a flexible choice for lifelong learners.

Taxpayers can claim 20% of the first $10,000 in qualified education expenses per return, up to $2,000. However, the LLC is non-refundable, meaning it reduces tax liability but does not result in a refund if the credit exceeds the taxes owed. Like the AOC, the LLC phases out for taxpayers with a MAGI above $80,000 for single filers and $160,000 for joint filers in 2024.

Only tuition and mandatory enrollment fees qualify for the LLC, unless books, supplies, and equipment are required by the institution for enrollment. Understanding these distinctions is essential for accurate tax planning and compliance.

Form 1098-T Details

Form 1098-T, issued by educational institutions, is critical for claiming education credits. It summarizes tuition payments and scholarships, which determine eligibility for tax benefits. Schools must provide this form to students by January 31 each year.

Box 1 on the form shows payments received for qualified tuition and related expenses, while Box 5 lists scholarships and grants. These amounts are key to calculating available credits. Taxpayers should cross-check these figures with their financial records to avoid errors. Mistakes or discrepancies can lead to audits or penalties.

Box 4 reflects prior-year adjustments, which may impact the current year’s credit and could require amending past returns. Additionally, expenses like books and supplies are not included unless directly billed by the institution, so taxpayers must track out-of-pocket costs carefully.

Calculating Qualified Amounts

Qualified education expenses must directly relate to enrollment or attendance at an eligible institution. These include tuition and fees required for enrollment but exclude personal costs like room and board.

Taxpayers should review their Form 1098-T and personal payment records to confirm the allocation of payments. For example, if $12,000 in tuition was paid and $4,000 in scholarships received, only the net $8,000 is eligible for credits.

Timing also matters. Payments made in the current tax year for courses starting within the first three months of the following year are typically eligible. Accurate calculations are vital to avoid errors or missed tax savings.

Coordination with Other Aid

Proper coordination of education credits with other financial aid is necessary to maximize benefits and avoid disallowed claims. Scholarships, grants, employer-provided assistance, and 529 plan distributions all affect the calculation of qualified expenses.

Tax-free scholarships and grants must be subtracted from qualified expenses before determining credit eligibility. For instance, if a student receives $5,000 in scholarships for $10,000 in tuition, only $5,000 can be used for credit purposes. Double-dipping—claiming the same expense for multiple benefits—is prohibited and can trigger penalties.

529 plan distributions, which are tax-free when used for qualified expenses, must also be coordinated. For example, taxpayers might use 529 funds for room and board while reserving tuition payments for credits. Strategic planning ensures compliance and maximizes financial benefits.

Filing Process

Claiming education credits requires careful attention to detail. Taxpayers must complete IRS Form 8863, Education Credits, and attach it to their Form 1040 or 1040-SR. This form calculates the credit and breaks down refundable and non-refundable portions.

All figures on Form 8863 must align with the 1098-T and personal records. Discrepancies can delay processing or result in denied claims. For example, if the 1098-T reports $8,000 in tuition but a taxpayer claims $10,000, supporting documentation like receipts will be required.

E-filing is recommended, as it reduces errors and speeds up processing. Many tax software programs guide users through eligibility and calculations, but taxpayers should still review submissions for accuracy. Even small mistakes, like entering an incorrect Social Security Number, can lead to rejected claims. Taxpayers with complex situations or multiple students may benefit from consulting a professional for assistance.