Prop. Regs Address New Reporting for Qualified Tuition Deduction and Education Credits

(Parker Tax Publishing August 2016)

Proposed regulations conform the reporting requirements for qualified tuition and related expenses, as well as education tax credits, with changes made by the Protecting Americans from Tax Hikes Act of 2015 and the Trade Preferences Extension Act of 2015. Two of the biggest changes reflected in the regulations deal with new rules which provide that (1) no education tax credit is allowed unless the taxpayer (or the taxpayer's dependent) receives a Form 1098-T, and (2) the amounts reported on Form 1098-T must reflect the amount paid, rather than the amount billed (although some institutions have a grace period in which to conform their reporting on this). REG-131418-14 (8/2/16).

On August 2, the IRS issued proposed regulations aimed at revising current regulations for reporting qualified tuition and related expenses under Code Sec. 6050S on a Form 1098-T, Tuition Statement, as well as revising current regulations under Code Sec. 6050S to reflect changes made by the Protecting Americans from Tax Hikes Act of 2015 (PATH). The proposed regulations would also amend the rules on the education tax credits to conform to changes made to Code Sec. 25A and Code Sec. 6724 by the Trade Preferences Extension Act of 2015 (TPEA) and PATH. The proposed regulations also update the definition of qualified tuition and related expenses to reflect the changes made by the American Recovery and Reinvestment Act of 2009 (ARRA) to clarify the rule for the prepayment of qualified tuition and related expenses in Reg. Sec. 1.25A-5(e), and to clarify the rule for the tax treatment of refunds of qualified tuition and related expenses in Reg. Sec. 1.25A-5(f).

Compliance Tip: While the regulations are generally proposed to be effective after they are finalized, the tax law changes to which they relate are generally effective for returns filed after 2015.

Both TPEA and PATH added new requirements for claiming education tax benefits. Under TPEA, for qualified tuition and related expenses paid during tax years beginning after June 29, 2015, a student is required to receive a Form 1098-T in order to claim the lifetime learning credit (LLC) or the American opportunity tax credit (AOTC) or claim a tuition deduction under Code Sec. 222. Before TPEA, there was no requirement that the taxpayer (or the taxpayer's dependent if the taxpayer's dependent is the student) receive a Form 1098-T to claim these tax benefits. Under PATH, the ability to claim the AOTC is further limited. First, the taxpayer can claim the AOTC only if the taxpayer includes, on his/her return for which the credit is claimed, the EIN of any educational institution to which qualified tuition and related expenses are paid. Second, the taxpayer can claim the AOTC only if the TIN of the student and the TIN of the taxpayer, on the return for which the credit is claimed, are issued on or before the due date of the original return.

In addition, before the enactment of PATH, Code Sec. 6050S permitted institutions to report either the aggregate amount of payments received or the aggregate amount billed for qualified tuition and related expenses during the calendar year for individuals enrolled for any academic period. PATH eliminated the option for eligible educational institutions to report the aggregate amount billed for qualified tuition and related expenses for expenses paid after December 31, 2015, for education furnished in academic periods beginning after such date. The proposed regulations reflect that change. However, because some eligible educational institutions complained that they could not implement the necessary changes in technology to enable reporting of aggregate payments of qualified tuition and expenses for calendar year 2016, the IRS said that it will not impose penalties against an eligible educational institution required to file 2016 Forms 1098-T solely because the institution reports the aggregate amount billed for qualified tuition and expenses rather than the aggregate payments of qualified tuition and related expenses received. Thus, for calendar year 2016, no penalties will be imposed if an educational institution fails to implement the PATH's amendment and continues to report the amount billed.

Observation: Reporting only the amounts paid instead of amounts billed is more helpful for return preparation since only amounts paid qualify for the education deductions and credits. Thus, receiving a Form 1098-T reporting the amount billed was useless in preparing the tax return.

The proposed regulations explain that the amount reported on the Form 1098-T may not reflect the total amount of qualified tuition and related expenses that the taxpayer has paid during the tax year because certain expenses are not required to be reported on the Form 1098-T. For example, expenses for course materials paid to a vendor other than an eligible educational institution are eligible for the AOTC. However, because these expenses are not paid to an eligible educational institution, these expenses are not required to be reported on a Form 1098-T. Accordingly, a taxpayer who meets the requirements in Prop. Reg. Sec. 1.25A-1(f) regarding the Form 1098-T requirement to claim the credit and who can substantiate payment of qualified tuition and related expenses may include these unreported expenses in the computation of the amount of the education tax credit allowable for the tax year even though the expenses are not reported on a Form 1098-T.

PATH amended Code Sec. 25A(i) to provide that the AOTC is not allowed if the student's taxpayer identification number (TIN) or the TIN of the taxpayer claiming the credit is issued after the due date for filing the return for the tax year. This amendment is generally effective for any return or amended return filed after December 18, 2015. This change is reflected in Prop. Reg. Sec. 1.25A-1(e)(2)(i). PATH also amended Code Sec. 25A(i) to provide that the AOTC is not allowed unless the taxpayer's return includes the employer identification number (EIN) of any institution to which the qualified tuition and related expenses were paid with respect to the student and the proposed regulations reflect this change in Prop. Reg. Sec. 1.25A-1(e)(2)(ii).

The proposed regulations also update and clarify the regulations under Code Sec. 25A to reflect the changes made by ARRA allowing students to claim the AOTC for expenses paid for course materials (such as books, supplies, and equipment) required for enrollment or attendance, whether or not the course materials are purchased from the institution. Before ARRA, the term "qualified tuition and related expenses" included tuition and fees, but did not include course materials, such as books, unless the cost of these materials was a fee that was required to be paid to the institution as a condition of attendance or enrollment.

For a discussion of the requirements for deducting qualified tuition or taking education tax credits, see Parker Tax ¶80,145 and ¶101,100, respectively.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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