(and what isn’t)
A 1098-t is a tax form that serves several purposes. It reports qualified tuition and fee payments made to your college, as well as scholarships received to offset those costs. But qualified expenses is a big tent-type of phrase that means different things in different situations. All by way of saying, your 1098-t is not an exhaustive list of qualified expenses.
Because the 1098-t only includes tuition, fees and scholarships, you’ll need to add some items to it to determine your total qualified expenses. And of course, qualified expenses differ depending on the situation.
For tax credit purposes, qualified expenses are limited to tuition, fees, and “other related expenses” plus, for the AOTC, the cost of required books and supplies. Often those books and supplies are purchased through third parties, so needless to say they are not on your 1098-t; you’ll need to keep your own records of those purchases for tax credits. That means that in order to claim the $2,500 maximum AOTC credit, you’ll need to have $4,000 of tuition, fee and book expenses that were not paid by either a scholarship or your 529.
For 529 purposes, qualified expenses mean all of the above, plus room and board, a computer, and computer-related expenses such as Internet access or software. So when it comes to calculating how much you can withdraw from your 529, you can add those additional expenses to the net amount on your 1098-t.
Here’s another hitch with the 1098-t: The school may report tuition and fees as they are paid or as they are billed. The latter pertains to winter quarter or spring semester which may be billed in the preceding year. If Box 7 is checked, then the 1098-t includes expenses for an academic term beginning in the first 3 months of the subsequent year.
Who uses the 1098-t? The person who is claiming the tax credit for the student. However, the 1098-t is always issued in the student’s SSN, not the parent’s.
The 1098-t has a related form, the 1099-Q. Form 1099-Q shows withdrawals from a tax-advantaged college savings plan such as a 529 or Coverdell ESA. That form is issued to whomever receives the distribution from the account. (Here is more info on why I think you should have distributions go to your student, not you.) Assuming you are paying for room and board from your 529, the amounts on it will not match what’s on your 1098-t. And remember, 529 money needs to be withdrawn in the same calendar year that it’s spent; don’t withdraw money in December for a bill that’s not due until January.
It is your responsibility to keep records of qualified expenses that are not paid directly to the school; per the IRS website: “Make sure you keep copies of all the documents you used to find out if you qualify and determine the amount of your credit. If the IRS audits your return and finds your AOTC claim is incorrect and you don’t have the documents to show you qualified, you must pay back the amount of the AOTC you received in error with interest. The IRS may also charge you an accuracy or a fraud penalty. Or, you can be banned from claiming the AOTC for two to ten years.”