If Scholarships pay all tuition, when are scholarships "recieved" and when is tuition "paid"?

Paying for College
1

We are lucky to have our child attend a college with an excellent aid package. I am still trying to understand the tax laws with regard to reporting tuition and scholarships. What I have read is that:

Tuition and other qualified education expenses are reported in the tax year they are paid.
Scholarships and grants are reported in the tax year they are received.

But if scholarships cover all tuition, the actual date the tuition is paid or that the scholarships are received is not so clear to me.

I don’t see how tuition can be considered “paid” if the scholarship hasn’t been “received.” From my point of view, if scholarships are paying all of tuition, both should always be in the same calendar year. Is this true?

Which of the following determines when tuition and scholarships are considered “paid”?
• When the invoice is issued showing both the tuition and the scholarships which cover it
• When the balance is paid, even though the balance is only paying for expenses
• When the scholarships are posted (which is what is listed on the 1098-T)
Note that sometimes the invoice lists a scholarship as “pending” and it posts at a later date (in my case in the following calendar year).

Here are my two scenarios

Scenario 1
• Invoice is issued from the college in December 2015.
• The balance due is paid in January 2016
• Scholarships were posted in December 2015

On this one, I would guess tuition and scholarships should be reported in 2015, even though the invoice was paid in 2016.

Scenario 2
• Invoice is issued from college in December 2016
• The balance due is paid in January 2017
• The December invoice applies scholarship as “scholarship pending”
• Scholarships were “posted” in January 2017 and so are NOT included in 2016 1098-T box 5

In this case, the 2016 1098-T shows all the tuition billed in 2016, but the scholarships posted in January aren’t included. Which year(s) should tuition and scholarships from this December invoice be reported?

Thanks for your thoughts. I understand that most likely those responding will be parents, like myself without a tax professional’s credentials.

2

“I don’t see how tuition can be considered “paid” if the scholarship hasn’t been “received.””

It’s a leap of faith a lot of schools make. Mine required me to send my award letters to them and, even when the money wasn’t yet received, it “counted” as paid so that I didn’t get dropped from classes even though some of the checks were mailed to the financial aid office later.

EDIT: Idk about the tax part of the question though.

3

My kids’ schools billed the spring tuition in Dec. It was due in Jan and FA, scholarships, and grants are not posted until Jan. If I paid anything not covered by scholarships in Dec, then that amount is credited in the prior tax year, so I don’t do that. I keep the spring semester payments in the ‘new’ year. (your scenario 2)

The 1098-T do show the spring tuition on the prior year’s form, so I don’t use the 1098-t. I just use the bills and payments and my own records for taxes.

4

Scholarships are “paid” on the disbursement date in student’s account.
Anything paid out of pocket is “paid” on the date you mail the check, charge it to your credit card, etc.
If the 1098 shows 2 semesters of tuition but only 1 semester of scholarships, you should only enter 1 semester’s worth of tuition when you do your taxes. (There might be different ways to tackle this)

That was the case for my D’s freshman year. The next 3 years, tuition charges & scholarships should match up. Graduation year will be another oddball.

They couldn’t have made it more complicated if they had tried. If I hadn’t learned about it through VITA volunteer training, I’m sure I would have been too intimidated to even attempt the AOTC.

5

@alooknac - Thanks for the info - it’s very helpful and confirms what I’ve guessed I should do. I agree that the number of semesters of tuition should follow the number of semesters of scholarships. Seems like this is so basic of a question that the IRS publication could have included a couple of examples to make it clear.

For some reason, our college changed the timing of posting from Freshman year to Sophomore year (as the two scenarios above show). Showing “Pending Scholarship” in December but posting the scholarship in January added a twist this year.

This also messes up the Income side of the equation (scholarship amounts used for non-tuition). In 2015, there were two semesters worth of income. In 2016, it looks like there will be one semesters worth. It’s possible there will be one year with 3 semesters worth of income.

6

^^My daughter’s tuition goes up about $2000 per year, so her Spring 2016 tuition isn’t the same as her Spring 2017.

I find it easier to keep the tuition and scholarships in the year billed/paid, and not use the 1098-t.

7

I like how my D’s school does it. The bills are due in Aug and Dec, the aid posts in Aug and Dec (10 days before term starts). So I can count all charges and aid received in the same year. The 1098T is correct as issued for us.

I tried to help a friend with their taxes, and they transferred schools and one school only reported one semester of charges, and one of aid on the 1098T, the other did 2 semesters of charges and one of aid.
It depends on their term starting days/billing cycles.

I would follow twoin’s advice and use the student semester statements as far as when things were charged and aid/payments credited.

My D receives a tuition scholarship, and a state grant as aid.

We claim the AOTC for only fees and books, and she reports the state grant as taxable income on her taxes.

8

@twoinanddone “I find it easier to keep the tuition and scholarships in the year billed/paid” I’m not sure what you mean by this as billed is different from paid. In my scenario 2, which tax year would you recommend reporting the Spring 2017 tuition and which year for the Spring 2017 scholarship?

@mommdc - I agree that posting the aid in the same fiscal year as the tuition is billed makes sense. If they didn’t change which year scholarships posted from year to year, it would have been so much simpler!

When you say, “when things were charged and aid/payments credited.” are you saying that scholarships were “credited” in 2016 or 2017 for my scenario 2? Tuition was billed in 2016.

I wrote to my college and they responded:
“you should be using the scholarship amounts designated for the semesters in 2016 to determine the appropriate tax amounts (amount paid toward tuition in the tax year). Because the IRS requires posting dates be used for reporting the total scholarship amount, you will not be able to use the 1098T specifically to calculate your tax credit. If you consult a tax professional, they should be able to advise you accordingly.”

9

@rmsdad, I found the following quote in IRS publication 970

I think if you are just looking at tax free and taxable scholarships, you can most likely allocate each tuition scholarship to the tuition billed in that semester. So no tax would be due on that.

But if you had other scholarships or grants covering more than fees and books paid in that year, or if you want to claim AOTC for those expenses, they would be taxable.

For AOTC the qualified education expenses have to be paid in the year you want to claim the credit for.

You might want to check with a tax professional.

Another thing is “anticipated aid”.

For example student has a tuition scholarship. The account will have that scholarship listed as anticipated aid before it posts. It is subtracted before the bill is sent. So even if the scholarship might not post until January, it is already counted as paid.

I don’t know if that makes sense.

10

Your scenario #2 is how my daughters’ schools do it: the bills come out in Dec, are due in Jan, and the schools don’t post scholarships, grants or any FA until Jan. I take all the Spring 2017 tuition and grants/scholarships in 2017. I know what they are expected to receive in FA because that’s been on the student portals since the prior July, but none of it is posted before 1/1.

D#2 had 10 scholarships/grants/ FA line items this year on her award portal. The school also posts things, takes them off, reposts them exactly the same way, so that those 10 line items turn into 20 or more on the billing statement. I don’t know why, to drive me crazy I think, but I’ve learned to match up all the items to make sure she gets everything (one scholarship is $32 short per semester this year, and I’m getting that back next year!). I don’t want to split things into different tax years.

11

At least the school has no problem admitting that the 1098-T, a form that is supposed to help the taxpayer determine eligibility for and calculate tax credits, can’t actually be reliably used for that purpose.

12

@BelknapPoint

Do schools generally have a problem with admitting this? Schools seem to want to stress over and over to families that they send us the 1098T only because the IRS requires them to. I have been told by multiple schools that the 1098T is generally not useful for individual families in preparing their own tax returns. I was given the impression instead that the purpose of the 1098T instead was for schools to report what they have released from their endowments - I am not sure about that, though. Is there another purpose?

For many families, there can be thousands of dollars difference between what the 1098T says and what the student’s cost/reportable scholarship entails, especially when the family pays everything for the spring semester in December, because the family wants to maximize 4 years of the AOTC for the student, and the family also wants to lower family assets before filing their next year’s financial aid. The student getting a full ride or at least full tuition, typically wants to declare part of the scholarship as taxable ($4,000 worth, less the QEEs of books and fees etc. p[aid in that year) and pay tax at the student’s bracket, so their parents can get the full AOTC.

The 1098T typically does not include mandatory fees (which can be QEEs), nor books, etc. that are often paid to the university. So I would think that in a significant number of cases, the 1098T is not useful at all for an individual taxpayer.

I agree that its best for folks to consult their own tax advisors if they have one. Lots of us can’t afford one, and want to rely on the IRS instructions instead. But these are unnecessarily complicated, and IMHO the 1098T makes it even more confusing especially when it doesn’t match.

I don’t know how often these are audited, or how often the IRS has ever rejected deductions for QEEs. I would expect, though, that an awful lot of people get confused about this every year as they prepare their tax returns, and some of these people may make mistakes.

13

Lucky for us, my daughter’s scholarship always lined up with her tuition. Tuition for spring semester is due in mid-December, and the scholarship was shown as “received” then. So her scholarship for spring 2017 would be on the 1098 for calendar year 2016 as it was paid then. Fall semester was due in mid-August and the scholarship was paid at the same time.