Section 25A of the current internal revenue code provides two education credits–the American opportunity credit and the lifetime learning credit. (Note that the American opportunity credit was formerly known as the Hope scholarship credit.) When you meet a variety of conditions and limitations, you can claim these credits against your federal income tax liability for qualified tuition and related expenses paid to an eligible education institution.
One of those conditions is timing—you must take the credit in the correct year. Generally that means the expenses paid must relate to an academic period that begins in the same taxable year you claim the credit or an academic period that begins in the first three months of the following taxable year.
The timing rule for expenses paid with loan proceeds (regulation 1.25A-5(e)(3)) says a credit may be claimed for qualified tuition and related expenses only in the taxable year in which the expenses are paid. Under this regulation, loan proceeds disbursed directly to an eligible education institution are treated as paid on the date the institution credits the proceeds to the student’s account.
The last sentence of the regulation states, “If the taxpayer does not know the date the institution credits the student’s account, the taxpayer must treat the qualified tuition and related expense as paid on the last day for payment prescribed by the institution.”
In Docket No. 4732-14S (McClain), a bench opinion issued May 1, 2015, the taxpayer was a student at a school that qualified under the rules of section 25A. The taxpayer applied for and was granted loans to pay his tuition when he enrolled in December 2011.
The proceeds of the loan were paid directly to the school and were applied against the taxpayer’s tuition charges on February 17, 2012. The taxpayer claimed an education credit of $2,500 on his 2011 federal income tax return.
The IRS agreed the taxpayer satisfied the requirements of section 25A. However, the IRS argues the taxpayer was not entitled to the credit because the credit was claimed in the wrong year.
The IRS says that if the credit is otherwise allowable in 2012, it is properly available in that year, that is, in the year the taxpayer’s student loan proceeds were applied against his 2011 tuition charges.
The taxpayer says the policy of the school was that a student could not begin classes until the student’s tuition was paid. Because the taxpayer’s classes began in December of 2011, he assumed his student loan proceeds were disbursed no later than the date his classes began. He did not know the actual date of disbursement until the school submitted that information for purposes of this trial.
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The trial exhibits showing the date the taxpayer’s student loans were credited to his account is dated April 30, 2015, which was the date this matter was tried. Apparently the document was faxed to IRS counsel by the school shortly before the trial started. There is no showing that the taxpayer was previously aware of the date the loan proceeds were credited to his account, and from his presentation we are satisfied that he was not.
In the words of the regulation we are satisfied the taxpayer did not know the date his student loan proceeds were credited to his account as of the date his return was filed. The taxpayer credibly testified that the policy of the school was that a student could not begin classes until the student’s tuition was paid. Because the taxpayer’s classes began in December of 2011, he apparently assumed his student loan proceeds were disbursed no later than the date his classes began, that is, the last date the school prescribed for payment was at the latest, the first day of class.
Under the circumstances, we are satisfied the last sentence of the regulation operates to allow the credit to be claimed in 2011. Therefore, we find the taxpayer is entitled to the education credit as claimed on his return.