New Rules Can Produce New Problems - AOTC and 1098-T

In writing a summary of a recent Tax Court summary opinion, I realized that a 2015 law change may cause problems for some students trying to claim the American Opportunity Tax Credit (Section 25A), Lifetime Learning Credit (Sec. 25A) or Section 222 above the line tuition deduction starting in 2016.  A 2015 law changes requires an individual to have received a From 1098-T from the university in order to claim the tax benefit.

In McCarville, TC Summary Opinion 2016-14 (4/4/16), M was a student at Arizona State University from August 2008 to graduation in May 2012. M paid his spring 2012 tuition of $4,895 on 12/18/11 although it was not due until January 25, 2012. He had already paid his fall 2011 tuition of the same amount on 8/6/11. In spring 2012, his only expense was textbook rental of $247. M claimed a $2,500 American Opportunity Tax Credit (AOTC) on his 2012 Form 1040A which also included wages from his part-time job. Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), was attached to the return.

ASU did not issue M a Form 1098-T for 2012 (likely because the tuition was paid in 2011). The IRS disallowed the AOTC claimed on the 2012 return. (It was easy for the IRS to spot because there was no Form 1098-T.)

At trial, the IRS acknowledged that M was entitled to an AOTC for 2012 of $247. The court agreed.

Observation: M’s problem was that he paid his 2012 tuition in 2011 when he had already paid $4,895 of tuition earlier that year, which caused him to reach his maximum AOTC of $2,500. While paying spring 2012 tuition two weeks early (in 2011) easily seems like a 2012 item to a layperson, the tax law is strict.

What guidance is available to students and their parents to avoid problems and maximize the AOTC? The 7 pages of instructions to Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), note that the payment must be in the year the credit is claimed. Many universities also include basic information and IRS links on their website about education credits.

Query: If instead of 2012, the year was 2016, is M unable to claim a $247 AOTC? Remember, he won't have a 1098-T (because he paid nothing to the university in that year)? If this is the case, hopefully the IRS can correct this problem such as by requiring the university to note on the Form 1098-T $0 paid to the institution, but that the person was a student there for the spring semester.  Or perhaps Congress needs to modify the law to allow claiming of the textbooks and other related expenses that are not paid directly to the university. That could be noted on Form 8863. However, it seems contrary to congressional intent in requiring a Form 1098-T, which serves to show that the student actually attends a college.

What do you think?

Some tax complexities for summer fun

Our federal tax law just seems to get more and more complex.  The current controversy about the 501(c)(4) reviews is an example (and per TIGTA's report, this appears to go beyond complexity). We also have fairly lengthy regulations from IRS and Treasury on how to implement changes by Congress.  We also have numerous changes by the American Taxpayer Relief Act of 2012, which includes both permanent and temporary changes.

I've got a guest blog post on CPELink's blog with three suggestions for practitioner's to include on their summer agendas - click here to see the list. 

What do you think? What would you add?

Income inequality, education and taxation

A recent blog post from The Tax Foundation (3/16/12) points out - "Census Data Shows Inequality Linked to Education, Not Taxes."   For years, data has shown that college grads tend to make a lot more annually than do those without a college degree.  But whether that means that taxes are completely innocent for the college versus non-college earnings situation doesn't tie for me. I raise the issue here of whether some of the government spending decisions, including the structure of tax expenditures (special tax rules), supports inequities that may make it more difficult for low-income individuals to get to college and to complete a college degree.

Some examples:

• The American Opportunity Tax Credit provides up to a $2,500 tax credit annually for each of the first four years of college for a student (so $10,000 tuition and expense assistance in total). This special tax rule is not available to all taxpayers because there is a phase-out provision. But that phase-out provision doesn't start to kick in until a fairly high income level - $160,000 for a married couple (no credit available once their income exceeds $180,000).  At this level of income, the couple is unlikely to qualify for a needs based college scholarship for their child.  We often hear that there is insufficient funding for Pell grants. So why are we giving government dollars (that come from all taxpayers) to people who don't really need it? (see my 3/22/11 post)
• Some (including me) would argue that our current charitable contribution rules are too generous.  There are a few examples, I'll share one tied to this education and tax topic.  I often hear from friends that the PTA or Home & School Club at their child's public school tells them they are expected to "donate" a certain amount based on how many kids they have attending the school. Under our existing tax law, this is a deductible charitable contribution.  The money is used for your kid's education. If they were at a private school, the amount would not be deductible. Let's eliminate charitable contribution deductions to schools your child attends.  This would raise more revenue that could be used to help schools where parents can't afford to donate money, for example.
• Another inequity tied to donating money to schools (or anywhere) is that as a deduction, it is an "upside down" subsidy in that it provides a greater benefit/subsidy to higher income individuals. For example, two people donate $2,000 to ABC Elementary School (or any charity). One donor is in a 20% tax bracket and the other in a 35% tax bracket. The 20% bracket donor is out of pocket $1,600 after taxes, but the higher income donor is only out of pocket $1,300. Changing the deduction to a credit would make this more equitable. It could also be cut back to enable federal and state governments to have more revenues to help address inequities in educational opportunities.
• Another area for modifying charitable contribution deductions is to reduce the deduction (or ideally credit percentage - see prior bullet point), is to have categories of donations. Some donations are made to entities with billions of dollars, such as some private college endowments. We are all funding getting more into these rich coffers due to the tax deduction. This could be cut back and revenues used to improve educational opportunities for those in need.

This is just a few examples of how the tax law contribute to enabling or supporting inequities that help continue income inequalities. The examples above tie to education but there are other inequities in the tax law which, if addressed, could generate funds to help reduce educational opportunity inequities that can help reduce growing income inequalities.

What do you think?