Time use of college tuition credit carefully

The U.S. Tax Court recently determined that a cash method taxpayer is entitled to claim an American Opportunity Credit only in the tax year when the payment was actually made – not for the academic year for which the tuition payment was made.

John and Brenda Ferm paid their daughter’s tuition at the local community college for the 2011 winter semester, which ran January through April 2011. They made the tuition payments in three installments with the majority of the tuition paid on Dec. 28, 2010.

The taxpayers timely filed their 2011 income tax return, but they did not claim the American Opportunity Credit, a tuition credit available to parents of dependent children who are undergraduate students.

On April 1, 2013, the taxpayers filed an amended return. On the amended return, the taxpayers claimed an American Opportunity Credit of $2,107.

On June 13, 2013, the IRS sent the taxpayers a notice of deficiency disallowing the American Opportunity Credit for lack of payment verification. The taxpayers filed a petition in court contesting the IRS in its disallowance of the credit.

The taxpayers provided the court with the appropriate evidence that the tuition had been paid. The court disallowed all but $157 of the credit because $2,151 of the qualified educational expenses was paid in 2010, not in 2011.

The portion of the tuition paid in 2010 cannot be used to claim a credit in 2011. Only $157 of qualified tuition and related expense was actually paid in 2011.

The American Opportunity Credit is allowed only when payment is made in the same year that the academic period begins. When a taxpayer prepays qualified tuition and related expense during one taxable year for an academic period that begins during the first three months of the following taxable year, the academic period is treated as beginning during the taxable year in which payment was made.

In this case (John Mark Ferm and Brenda Kay Ferm vs. Commissioner, T.C. Summary Opinion 2014-115, Dec. 30, 2014), the academic year and the majority of the tuition payments were considered 2010 transactions, not 2011, explaining the court’s disallowance of most of the credit.

The Tax Court’s opinion in this case may not be used as precedent for any other case.