Something new to me regarding Education Credits

[Tax Prep by Deb]

I hope someone has some kind of guidance for me, as this is totally new to me. 

 

I have clients who work for Starbucks.  Starting the fall Semester Starbucks agreed to reimburse their employees college tuition thru a specific online university in Arizona.  The deal is that they will only

be reimbursed when they have completed and passed classes that equal 21 units.

 

The statement from the college shows the amount billed (clients paid the fee by taking out student loans and qualifying for other scholarships and grants).

 

Question is, knowing that they will be reimbursed later for this, do we take the hope credit?  They meet all the tests, but my concern is what happens when (hopefully not if) they get reimbursed?

 

Any thoughts!

[BulldogTom]

Cash basis taxpayer.  Calendar year accounting.  You can't forecast that there will be a reimbursement.  Take the credit.

 

When the reimbursement comes in, treat it just like a scholarship that covers more than the cost of the education in the year it is received.

 

Tom

Newark, CA

[Janitor Bob]

It is possible that the reimbursements will be included on their W-2s as taxable income or they will get a 1099-MISC...In this case, I would go ahead and claim the Hope as normal...students will pay taxes on the reimbursements when they receive them.

[Pacun]

Without knowing the situation at Starbucks, I will explain my situation and make your deductions.

 

I was taking classes for a Masters and my company reimbursed me 100% for As and 80% for Bs, to the maximum allowed by the IRS which was $5,250 for 2014. So, I would take only 1 class per semester because the cost per class was about $2500. So, I would not qualify for any education credits on my 1040 because I didn't pay anything from my pocket... but my education was fully paid by my company tax free to me.  If I decided to take two classes each semester, then I would pay $10,000 to school and my employer would only reimburse me only $5,250 tax free and the rest would be added to my W-2.  If I paid 10K, then I could use $4,750 for tax credits. That would be true if the employer reimburse me after $5,250 or I paid from my funds.

Legal challenge... You go to school knowing that the company will reimburse you and you spend 5K in 2014 but the company's slow process refunds you in June 2015. Technically you could claim AOC and then later on add that amount to your salary and pay taxes for it.

 

I read somewhere that you also have to return the benefit from the money you receive in later years or you must amend 2014.

[Lee B]

First we need to know whether the Starbucks program qualifies as a tax free Educational Assistance under IRC 127

currently limited to $ 5,250 per year. If it does, to extent that we receive a tax benefit in one year, the future year reimbursement

becomes taxable income.

[BulldogTom]

First we need to know whether the Starbucks program qualifies as a tax free Educational Assistance under IRC 127

currently limited to $ 5,250 per year. If it does, to extent that we receive a tax benefit in one year, the future year reimbursement

becomes taxable income.

 

I agree with CBSLEE.  If the reimbursement is taxable, it will most likely be included in the student's W2. 

 

If it is under a tax free plan, the benefit has been received in the current year and the reimbursement would become taxable in the year received.  I would treat it just like a scholarship payment in excess of the cost of the educations in that year.

 

No different than a high school senior who gets more scholarship money than they need for the first semester of school.  Even though they save that money to pay for future years, they have to take into income the excess over the cost of education in that first year, and then they get to take the education credits in the subsequent year.

 

Tom

Newark, CA

[SaraEA]

If you claim an education credit one year and then get an adjustment to the tuition it was based on, you have to recapture the credit the year the adjustment was received.  It's a pain--you have to go back to the original year and recalculate the credit based on the lower tuition amount, subtract that from the credit originally taken, and pay the difference back on the current return.  In any case, do not amend the original.

 

Isn't there some rule that online schools have to have a physical campus somewhere to be eligible institutions for the ed credits?

[Lee B]

The only qualifier that  I remember is that the educational institution must on the list of eligible institutions that enrolled students can borrow funds from the

Federal Student Loan Program. This list includes lots of private vocational schools and even some colleges outside the US. My youngest daughter

graduated from Simon Frasier in Vancouver  BC which she partially paid for with Federal Student Loans.

[Pacun]

If you claim an education credit one year and then get an adjustment to the tuition it was based on, you have to recapture the credit the year the adjustment was received.  It's a pain--you have to go back to the original year and recalculate the credit based on the lower tuition amount, subtract that from the credit originally taken, and pay the difference back on the current return.  In any case, do not amend the original.

 

Isn't there some rule that online schools have to have a physical campus somewhere to be eligible institutions for the ed credits?

 

No. I think that as long as the university participates on the Financial Aid program run by the US Department of Education, they are OK.

 

So, why will you take the credit if you will have to recalculate the credit?

Edited January 29, 2015 by Pacun

[Pacun]

The only qualifier that  I remember is that the educational institution must on the list of eligible institutions that enrolled students can borrow funds from the

Federal Student Loan Program. This list includes lots of private vocational schools and even some colleges outside the US. My youngest daughter

graduated from Simon Frasier in Vancouver  BC which she partially paid for with Federal Student Loans.

Financial aid is the key word, not federal loans.

[BulldogTom]

If you claim an education credit one year and then get an adjustment to the tuition it was based on, you have to recapture the credit the year the adjustment was received.  It's a pain--you have to go back to the original year and recalculate the credit based on the lower tuition amount, subtract that from the credit originally taken, and pay the difference back on the current return.  In any case, do not amend the original.

 

Isn't there some rule that online schools have to have a physical campus somewhere to be eligible institutions for the ed credits?

But we are not talking about an adjustment to the tuition, we are talking about a payment used for paying tuition.  A distinct difference.

 

Tom

Newark, CA

[kcjenkins]

So, why will you take the credit if you will have to recalculate the credit?

Because you don't know if or how much the change will be.  Plus, the 'time value of money' issue.  

[SaraEA]

I should have said adjustment to "qualified education expenses."  Say you pay $5k for tuition etc and take the credit based on that amount. Next year after you complete the courses your employer gives you $3k.  You have to go back to the prior year and recalculate the credit for $2k tuition and recapture the difference.  It really is the same as adjustments to prior year expenses that appear in the box on the 1098T (like when a scholarship is paid late or a student drops a course in Jan that was paid for in Dec).