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Federal File

Coverage of legislation and regulatory activity that affects higher education

By Liz Clark

Simplification of Education Tax Credits Remains Elusive

For the past several years, the Obama administration has called for changes in reporting methods on Internal Revenue Service (IRS) Form 1098-T. These changes would help eliminate confusion for students and families and reduce the number of erroneously claimed education credits; however, until recently, the idea had not gained much traction.

When Congress passed the sweeping budget and tax bill—the Consolidated Appropriations Act of 2016—on Dec. 18, 2015, lawmakers unexpectedly included the administration's proposal. The Internal Revenue Code was amended to eliminate the option of reporting in Box 2 amounts billed for qualified tuition and expenses on Form 1098-T, Tuition Statement. Instead, effective for 2016 forms, which will be filed in early 2017, all colleges and universities will be required to report in Box 1 the amounts paid for qualified tuition and expenses.

Making the Change

NACUBO is urging IRS to delay implementation of this change and recently called on colleges and universities to communicate to IRS the challenges they face in light of the new reporting requirement. Based upon informal estimates, NACUBO believes that the vast majority of institutions of higher education currently report in Box 2 amounts billed.

NACUBO believes that in order to simplify the American Opportunity and Lifetime Learning tax credits, Congress should revisit the parameters used for these and other education tax benefits.

For institutions that will need to make the switch to Box 1 reporting, compliance with the change will be onerous due to reliance on software providers to deliver necessary systems changes that need to be implemented; complications of the initial year of transition from Box 2 to Box 1 reporting; and the fact that institutions began accepting payments at the beginning of the year, allowing no time to make processing adjustments for tax year 2016.

While some institutions have been reporting in Box 1 amounts paid for qualified tuition and related expenses, for a number of reasons most schools have only reported in Box 2 the amounts billed for qualified tuition and related expenses. Many colleges and universities, currently reporting in Box 2, were limited by the offerings of their software provider.

Additionally, there is concern about the ability to provide accurate information, because of the manner in which payments are applied to both qualified and nonqualified expenses on the student's account. For example, charges for room and board are not qualified expenses for purposes of the education tax credits. Timing also complicates matters, since tax credits may be claimed for payments made during one tax year for qualified education expenses applicable to study during the first three months of the next calendar year. The timing of student aid delivery further muddles calculations, often changing the application of payments.

It's Complicated

In 2002, IRS finalized the regulations of §1.6050S-1, which governs the reporting requirements imposed on institutions of higher education in connection with the introduction of the Hope and Lifetime Learning tax credits, authorized by the Taxpayer Relief Act of 1997. Since that time, IRS has provided little additional formal guidance to colleges and universities, and over time institutions have demonstrated considerable variation in understanding what needs to be reported on Form 1098-T. NACUBO published Advisory Report 2013–2 to attempt to provide greater clarity and voluntary conformity.

Recognizing the difficulty of making this newly mandated change, particularly in the first transition year, NACUBO is working on additional guidance for 1098-T reporting.

NACUBO is working on additional guidance for 1098-T reporting.

The goal of the Obama administration and lawmakers on Capitol Hill is to make it easier for students and families to understand and use the information that schools provide on Form 1098-T, to help them claim the American Opportunity and Lifetime Learning tax credits. NACUBO agrees that more could be done to help taxpayers and students understand education benefits—but the answer does not lie in changing the reporting method. In fact, the shift to reporting amounts paid for qualified educational expenses could complicate the calculation for students and families. When students and families complete their tax forms—specifically IRS Form 8863—they will need to account for changes in enrollment, application of aid, and other factors that schools may not be able to capture in the amount reported on Form 1098-T.

NACUBO believes that in order to simplify the American Opportunity and Lifetime Learning tax credits, Congress should revisit the parameters used for these and other education tax benefits. For instance, it would be beneficial to conform across programs the definition of qualified educational expenses. Also in question is whether a credit claimed in one tax year should be applicable to education provided in the following year.

Tightening Up on Tax Credits

An estimated 3.6 million taxpayers received more than $5.6 billion in potentially erroneous education credits on their 2012 tax returns, according to a 2015 report published by the Treasury Inspector General for Tax Administration. TIGTA audits from 2011 and 2012, which also revealed billions of dollars of erroneous education tax credits, made recommendations to the Internal Revenue Service in an effort to limit the number of incorrect or fraudulent claims.

The Treasury Department is keenly interested in reducing erroneous claims and combating tax fraud related to the education credits. To meet this objective, the Treasury Department has steadfastly argued that moving all institutions to Box 1 reporting would bring clarity and accuracy to administration of the credits.

NACUBO will continue communicating to lawmakers and regulators in Washington about the magnitude of the problem, the practical hurdles campuses face, and specific issues related to the transition. Additionally, we will continue to argue that the solution to a more transparent administration of the education credits lies in simplifying and reshaping the credits themselves.  

NACUBO CONTACT Liz Clark, director of federal affairs, 202.861.2553, @lizclarknacubo


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