Writer Ambrose Bierce defined a day as a period of twenty-four hours, mostly misspent. In tax law, thanks to “timing rules,” misspending during those twenty-four hours can mean the difference between benefiting from a credit or losing it.
For example, take the American opportunity education tax credit timing rule. The credit is allowed only for payments of qualified tuition and related expenses for an academic period beginning in the same taxable year as the year the payment is made (Regulation 1.25A-5(e)(1)). When you’re a cash basis taxpayer, qualified tuition expenses are usually treated as paid in the same year you actually pay them.
The timing rule for this credit also contains an extension called the “prepayment” rule. Under the extension, you can claim the credit when you pay qualified tuition and related expenses during one taxable year for an academic period that begins during the first three months of your next taxable year. You have to take the credit on your federal income tax return in the taxable year in which you make the payment.
In T.C. Summary Opinion 2014-115 (Ferm), the taxpayer made three payments toward the spring 2011 tuition for his daughter: $2,150.85 on December 28, 2010; $50 on January 3, 2011; and $165.45 on May 6, 2011. The taxpayer claimed an American opportunity credit of $2,107 on his 2011 tax return, based on the total qualifying expenses.
While agreeing the December 2010 payment was for tuition expenses, the IRS disallowed the part of the credit related to that payment because it was not made in 2011.
The IRS does not dispute the taxpayer paid qualified tuition and related expenses in December 2010 for the academic period beginning January 2011. The taxpayer was therefore entitled to an American opportunity credit with respect to this payment, if at all, for taxable year 2010.
Neither the statute nor the regulations permit a cash method taxpayer an American opportunity credit with respect to a year other than the taxable year in which the payment was actually made. Accordingly, the taxpayer is not entitled to a credit for taxable year 2011 with respect to the December 2010 payment of $2,150.85.
We realize the statutory requirements may seem to work a harsh result in a case such as this where a four-day delay in making the December 2010 payment would have engendered a different result. However, the court must apply the statute as written and follow the accompanying regulations when consistent therewith.