Lifetime learning credit / 1098t question

[by_1008]

I am a current graduate student trying to maximize my lifetime learning credit. I started my program in the Fall semester of 2014. Part of my tuition each semester is paid by a scholarship provided by the school.

Though I was billed for the Spring 2015 semester in Dec 2014, my payments (via loans) weren't actually credited to my account until Jan 2015. Am I correct then that these payments should be considered 2015 qualified education expenses even though they were included in my 2014 1098-T, box 2? (thus reducing my qualified education expenses for 2014)

I'm thinking that this is correct, and I only report what I actually paid via loan in calendar year 2014. This would reduce my lifetime learning credit (since my expenses for 1 semester of 2014 would be below the $10k cap), but would basically allow me to spread out my education expenses over 3 tax years, instead of 2. (As a result, I will likely get the full credit in 2015, and about 75% of the max credit in both 2014 and 2016, instead of the full credit in tax years 2014 & 2015).

Am I thinking this through correctly? I guess I just want to make sure that I'm correct in noting the discrepancy between my 1098-t and the expenses I actually incurred.

[SomedayStache]

(Not a tax expert...but this was briefly discussed in the VITA training I recently attended)

I think you could claim those expenses either way, as long as you don't try to double dip and claim them twice.  So it's either get it now or get it later.

The most correct way in my line of thinking would be to do as you suggest and claim the amounts paid in 2015 on  your 2015 taxes...though you'll need to remember next year to add those back in as they won't show up on your 2015 1098T.

Keep copies of the payment records from your university as documentation.

If I'm wrong I'm sure somebody will correct me.

[by_1008]

Thanks for the reassurance.

I even thought about characterizing some of the scholarship as taxable income so as to increase my qualified expenses up to the max. But it turns out the gains I would receive from the tax credit (at a 20% rate) are less than the increased taxes from a higher income due to my state taxes (15% marginal rate + ~6% state tax rate)

[johnny847]

This seems correct to me.

And good catch by_1008 on the tax credit being worse than the increase in fed + state taxes! I faced this situation too for 2013 tax year. Incidentally, some tax software will not catch this, as they will optimize state and federal taxes separately.

Just something to keep in mind if your situation changes (currently this shouldn't apply as you're saying you have $7500 in educational expenses to report for the 2014 tax year):
You may be better off claiming the tuition and fees deduction  instead of the lifetime learning credit this year. Now, you can't double dip - you can't claim the tuition and fees deduction if you claim the lifetime learning credit. So, if you claim the tuition and fees deduction, unfortunately the deduction is capped at $4000, whereas the lifetime learning credit is capped at 20% of the first $10k. So if you have $4000 of educational expenses or less, you're better off with an effective 21% tax deduction, as opposed to the 20% credit.


By the way, does your state offer a 529? Are you taking advantage of the possible 529 tax loophole? I have a blog post about it: https://fiby40.wordpress.com/2015/01/22/the-529-tax-loophole-only-for-those-who-pay-for-educational-expenses/