Understanding form 1098-T.

• Author: Holland, Barry L.

Clients bring a lot of documents to their tax advisers during tax season. With or without the help of tax software, tax professionals expect the numbers reported on clients' information returns to appear in logical places on their tax returns. In general, they know exactly where to find the wages reported on Form W-2, the interest income reported on Form 1099-INT, Interest Income, the nonemployee compensation or other income from Form 1099-MISC, Miscellaneous Income, and the mortgage interest expense shown on Form 1098, Mortgage Interest Statement. A quick glance at those relevant lines on Form 1040 or its attachments usually enables preparers to quickly check that they have correctly reported those amounts.

Unfortunately, not every information return is as clear. Clients with children in college or who pursue their own academic endeavors often have at least one Form 1098-T, Tuition Statement. Form 1098-T presents tax advisers with various challenges. These issues arise partly from the law (primarily Sec. 6050S) and partly from issues unique to the higher education community. By understanding these matters, a practitioner can help to ensure his or her clients' compliance and help them to receive the greatest benefit from the available credits and deductions.

Form 1098-T

Indirect relationship: One major challenge presented by Form 1098-T is that its numbers usually do not transfer directly to Form 1040 or 8863, Education Credits (Hope and Lifetime Learning Credits). Qualified tuition and related expenses (QTREs) that a client can use in computing a Hope credit (Sec. 25A(b)), lifetime learning credit (Sec. 25A(c)) or tuition-and-fees deduction (Sec. 221) usually include amounts not reported on Form 1098-T.

Reporting options: Schools have several available reporting options. Their primary choice is whether to report QTREs on the basis of the payments received or the amount billed during the calendar year; see Sec. 6050S(b)(2)(B)(i). Approximately 85% of schools responding to a 2004 survey conducted by the National Association of College and University Business Officers (NACUBO) indicated they reported QTREs on the basis of amounts billed; see "1098-T Reporting Survey Results" at www.nacubo.org/documents/business_topics/1098T_survey_results.pdf.

The amounts-billed reporting method yields numbers that are only moderately relevant to a cash-basis taxpayer, creating the need for the practitioner to understand the timing of actual events behind the reported figures. The timing presents a challenge for calculating qualified expenses, particularly for students whose scholarships are greater than their...