As the end of the year approaches, start thinking about education tax credits. Why? The two federal education credits available for 2015 — the American Opportunity Credit and the Lifetime Learning Credit — include timing rules.
For example, say you’re planning to pay qualified tuition expenses with loan proceeds. You can claim an education tax credit for expenses paid with the proceeds of a loan in the taxable year in which the expenses are paid. That means when you pay tuition in 2015 with loan proceeds and you’re eligible for a credit, you’ll claim the credit on your 2015 federal income tax return. This rule specifically states the credit is claimed in the year the proceeds are disbursed, not when the loan is repaid.
If the loan proceeds are sent directly to your school, the expenses are treated as paid on the date the school credits the proceeds to your account. How do you know that date? Your school can provide a student financial account statement to help you claim the credit in the correct year.
If you’re not sure of the date the loan proceeds were credited to your account, the rules say you treat the expense as paid on the last day for payment prescribed by the school.
Here’s an illustration. Your school’s policy is that you can’t begin classes until tuition is paid. Your classes begin in December. Your loan proceeds are credited to your account the following February. When you file your tax return in April, you believe the school would not have allowed you to attend the course unless your tuition was paid when the classes began. Would you use the expenses to claim the education credit on the return you’re currently filing or next year’s?
A recent tax court opinion allowed the credit on the current return. The decision hinged on the taxpayer proving he was not aware of the exact date the loan proceeds were credited to his account.