Proposed Regs. Govern Reporting and Claiming Qualified Tuition and Related Expenses

The IRS issued proposed regulations (REG-131418-14) revising the rules for reporting and claiming tax credits or a deduction for qualified tuition and related expenses. The proposed amendments would conform existing regulations to law changes made by the Protecting Americans From Tax Hikes (PATH) Act of 2015 (Division Q of the Consolidated Appropriations Act, 2016, P.L. 114-113) and the Trade Preferences Extension Act of 2015, P.L. 114-27.

Form 1098-T changes

Under the Trade Preferences Extension Act, students must receive a Form 1098-T, Tuition Statement, to claim an American opportunity tax credit, lifetime learning credit, or a deduction under Sec. 222 for qualified tuition and related expenses.

Accordingly, the proposed regulations would provide that for tax years beginning after June 29, 2015, unless an exception applies, no education tax credit or Sec. 222 deduction will be allowed unless the student or taxpayer receives a Form 1098-T. The proposed regulations would allow for circumstances where certain eligible expenses might not be included on the form, such as those for required course materials (for the American opportunity tax credit only) paid to a vendor other than the eligible educational institution. In that situation, taxpayers who can substantiate eligible expenses not reported on the form and who otherwise meet the requirements would be allowed to include those unreported expenses in computing the education tax credit.

Another exception is provided for students who do not receive a Form 1098-T by the later of (1) Jan. 31 of the year following the tax year for which the credit is claimed, or (2) the filing date of the return claiming the credit, if taxpayers or students have requested the form in the period and manner prescribed and cooperated fully with the educational institution’s efforts to obtain necessary information from them.

The proposed rules would retain a reporting exemption under current rules for noncredit courses (Regs. Sec. 1.6050S-1(a)(2)(ii)). They would remove existing exceptions, however, for nonresident aliens and students whose qualified tuition and related expenses are entirely paid by scholarships or under a formal billing arrangement as defined under Regs. Sec. 1.6050S-1(a)(2)(iv).

The proposed regulations also would make reporting more specific for qualified tuition and related expenses paid in one tax year that relate to an academic period beginning in the first three months of the next calendar year (the “prepayment rule”). Under current rules and procedures, this information is aggregated with expenses paid for the current year, with an indication that it is included. A proposed rule would require the prepaid amount be specifically stated on the Form 1098-T. Another proposed rule would require the educational institution to indicate the number of months the student was a full-time student during the calendar year, which the IRS says will help it determine whether students are properly claimed as dependents.

The regulations also would be amended to conform with the PATH Act requirement that institutions report only amounts paid rather than, as previously, either amounts billed or paid (with transition relief by Announcement 2016-17 for calendar 2016).

Identification requirements

The PATH Act required taxpayers claiming the American opportunity tax credit to include on their return the employer identification number of the educational institution to which qualifying tuition and related expenses are paid and the tax identification number (TIN) of the student and (if different) the taxpayer. In addition, the TIN(s) must have been issued on or before the due date of the return on which the credit is claimed. The proposed regulations reflect these changes for returns filed after Dec. 18, 2015.

Comments requested

The IRS asks for comments regarding removing the exception to providing Forms 1098-T for nonresident alien students, including how an institution determines whether a student is a nonresident alien. The Service also requests comments on retaining the reporting exception for noncredit courses.

The proposed regulations would become effective upon their adoption and publication as final.

—Paul Bonner (pbonner@aicpa.org) is a Tax Adviser senior editor.