The As to Zs of 1098-Ts

Friday, September 08, 2023

Issuing 1098-T forms can generate a lot of paperwork, and if done incorrectly can result in considerable penalties from the IRS. Navigating the annual event doesn’t have to be a daunting challenge for your business office, though. As your partner in higher education, we’re here to help you through the process. 

Here’s what higher education institutions should know about these yearly tax forms. 

What is the 1098-T?

The Taxpayer Relief Act of 1997 introduced several education-related deductions and tax credits. To help students and their parents track their qualified spending on tuition and expenses, the IRS created Form 1098-T. The form includes the amount of payments received for qualified tuition and related expenses, as well as information like the student’s name, address, and taxpayer identification number (TIN). It also includes adjustments, scholarships, and grants. 

Who needs a 1098-T?

Higher education institutions are required to issue these forms for any individual for whom a payment was made for qualified tuition and related expenses during the calendar year, regardless of who made the payment or if it was paid with a grant. Non-US residents do not have to be issued a 1098-T unless they specifically request one. 

If an individual was enrolled in a non-credit course, they may be exempted from receiving a 1098-T. Institutions don’t need to issue a 1098-T if the student’s entire tuition and related expenses were paid by scholarship or if entire payments were made as part of a formal billing arrangement – such as through an employer or through the Veterans Administration. 

What counts as “qualified education expenses?”

Box 1 of the 1098-T should include payments made for items that are directly related to the student’s pursuit of their degree. This includes tuition paid for classes, but also any expenses that are required for enrollment, such as technology or lab fees. 

Personal expenses like room and board, medical expenses or parking/transportation are excluded from Box 1. Any expense for courses involving sports, games, or hobbies should be excluded from Box 1 unless the course is part of the student’s degree program. 

What’s the most common error and how can you avoid it? 

Perhaps the easiest way to run afoul of the IRS and encounter penalties is with Taxpayer Identification Numbers, or TINs. For each missing or incorrect TIN, schools are assessed a penalty by the IRS. Correcting the forms promptly can significantly reduce these penalties. 

The easiest way to avoid penalties altogether is to make sure you’re proactively securing each student’s TIN. Including W-9s during your admissions process can ensure you collect the data you need. However, all the IRS requires to avoid a penalty is that once a year, you ask for TIN numbers in writing from any student who’s missing one. Assuming you’ve completed this critical step, you can check a box on the 1098-T form indicating that you’ve done your due diligence. 

When do I need to issue 1098-Ts?

Institutions are required to send 1098-Ts to students by January 31 and submit the 1098-T data to the IRS by March 31.

How can you ensure compliance and cut down on paperwork?

If you’re still stuffing envelopes in January, it’s time to take your tax season process to the next level. At ECSI, we’ve developed a 1098-T solution that streamlines the process and helps you ensure compliance. 

In addition, we’ve created several ancillary services to reduce your staff’s workload. 

  • E-consent: We provide an email and website for your students, allowing them to consent to receiving their 1098-Ts electronically. 

  • W-9s: Solicit TIN numbers securely online through a dedicated, school-branded website that you can send to students and link to from your website.

  • SSN/Name Validation: We’ll check TIN numbers four different ways to identify potential incorrect information and give you time to correct it. 

  • Address Validation: Address verification ensures the forms are delivered to the right place the first time.

ECSI’s TaxSelect team can take the hassle out of generating 1098-T forms for your staff – just as we have for hundreds of other schools. Our experienced staff have been providing comprehensive tax document services to higher education institutions since the inception of the Taxpayer Relief Act of 1997. Contacting [email protected] today can help you ensure you’re on a path to take control of next tax season.

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