Qualified Education Expenses, Taxes and Whine

Ok, I confess, I probably haven't been as diligent as I should have been when it comes to calculating qualified education expenses.
 In the past I received the 1098T which commonly reflects how much qualified education expenses were billed and how much financial aid (scholarships & grants) were received in the tax year and I would subtract the 2 amounts and as the difference always exceeded the aid by more than the $4,000 needed to max out the American Opportunities Credit (AOC), I reported $4,000 without the need for extensive mathematical contortions.  This year was different in that the 1098T for one of my dependents actually reflected that we received more aid than the billed qualified education expenses and one of the online tax preparation programs not only indicated that I could not claim a credit, but also related that my dependent owed taxes on the "overage".  Of course my initial reaction was: "What gives?  I know we paid a substantial amount for college this year."  Upon investigation, I learned that this was due to the college billing near the end of the preceding tax year (in this case 2012) for the Spring 2013 semester whereby we paid our portion in 2012, but all of the scholarships were credited in 2013.  This and my daughter's decision to take Spring 2014 to work a "coop" in engineering (she remains a student, works and no bill at the end of 2013 for Spring 2014) accounted for the upside down 1098T.  Regardless, in researching the situation, I found that we did pay a substantial amount for the Fall 2013 semester (as well as had loans incurred at the beginning of 2013 for the Spring 2013 semester).

Here are 3 lessons I learned regarding qualified educational expenses:

Lesson #1:  Just because 1098T reports a billed amount and an "aid" amount, don't assume that the difference reflects the amount of education expenses that YOU PAID for qualified expenses.  As reflected in my situation some of this difference was not what I paid but actually "aid" that showed up in the next tax year.  To thoroughly determine the tax credit, you MUST go to the college bill.  The best way that I came up with in making sense of this was to use Microsoft Excel, pull the tuition for a semester over to a column, then subtract out the scholarships and aid received for that semester to find our "payment" to tuition (a qualified expense for every situation).  Then I needed to add in qualified expenses that were allowed for the particular tax credits (e.g. for the AOC add in the allowable required fees and books).

Lesson #2:  You need to determine what "qualified educational expenses" means for the specific tax credit that you are claiming.  For example, qualified education expenses for the Federal American Opportunity Credit includes "expenditures for course materials, as well as tuition and required fees. For this purpose, the term 'course materials' means books, supplies and equipment needed for a course of study."  In contrast, New York State offers a tax credit for education expenses and the qualified expenses for this credit includes tuition, but does NOT include "amounts paid for books, equipment, and activities, even if required by the school".  As another contrast, qualified expenses for educational costs paid from a 529 account is even more generous than the American Opportunity Credit in that it permits the costs of room and board (up to a limit).  (What this suggests to me is that if you take a 529 distribution, it may be advantageous to allocate that portion to room and board).

Lesson #3:  Room and board can kick your tax credit butt.  As I related in my opening, I tried previously to not get into the weeds of the college bills (yes, guilty - I left this to my wife to wrangle with my daughters thinking "ignorance is bliss").  Due to this dose of reality check, it became clear that as the family tax preparer, I needed to examine and understand the college bill.  Wow, I was shocked to see that the dorm "room rent" was around $4,000 and the meal plan was about $2,500 per semester... so $13,000 annually right there in college expenses that won't count toward the AOC!

If there is any consolation in this tax trip to enlightenment, it is that likely there are numerous others out there who have botched (and continue to botch) these tax credits far worse than I have and that even after doing the required mathematical contortions I have been (more than likely) eligible for the credit.  I will also remark that after better understanding the structuring of these credits, it seems that the middle class continues to be squeezed by the cost of secondary education whereby members of this class qualify for little need based aid and are hit hard by significant (relative to income) "unqualified" required educations costs such as high room and board.