In this YouTube video, The Bemused looks at the correct way to calculate tuition tax credits. It can be confusing for a person if they are not entirely familiar with the rules. Many people believe they are supposed to enter the total fields and then subtract the grants and scholarship items listed.
Instead, a person should use Form 8863 to calculate these expenses.
The truth is the tax credit is based on any cost paid for the student’s learning during the calendar year. The instructions on the form make it clear that it does not matter if the expenses were paid for in cash, credit, or with borrowed funds. The amounts on the 1098-T may not reflect the total amount of qualified education and related expenses for the year. Understanding this, a person should only use the parts they paid for the calendar year and not include any amounts reimbursed directly by scholarship funds.
Expense lumping happens when the school lumps together the expenses billed in the fall of one year and the spring of the following year. From the educational facilities standpoint, those expenses were billed during the previous year, but this does not benefit the student in all cases. Schools are now required to list the costs inbox one accurately in the future. To help avoid some of the puzzles this may cause at the end of a college career, a tax preparer should request a transaction history from the student’s school to get the information actually paid on the student’s behalf.
