1098-T Question - Who Can Claim the Education Credit When Parents Paid?

Thanks for explaining this so clearly. It's disappointing but makes sense. If my spouse and I claim the credit, would it be considered income to us that we'd need to report somewhere since my in-laws paid it? I'm worried about getting flagged for an audit if the money didn't actually come from us.

The good news is that you don't need to report your in-laws' payment as income. The IRS treats this as a gift from your in-laws to you. Gifts are not considered taxable income to the recipient. When you claim the education credit, you're essentially certifying that you had qualified education expenses. The fact that someone else paid those expenses on your behalf doesn't prevent you from claiming the credit. This is a common situation with parents or other family members helping with education costs.

How exactly does this work if my parents paid for my tuition but I'm not their dependent anymore? Does the tool explain what documentation I need to keep in case of an audit?

That website looks interesting but I'm skeptical. Does it actually give advice beyond what's available on the IRS website? My situation is kinda complicated because my grandparents paid my tuition directly to the school but the 1098-T has my name on it.

The tool specifically addresses situations where someone other than the student or the person claiming them pays the tuition. It explains that the student (you) can still claim the credit even when you're not the one who paid, as long as you're not claimed as a dependent by someone else. For documentation in case of audit, it recommends keeping proof of the payment (like bank statements or canceled checks from your parents) along with a signed statement that the money was a gift for education purposes. This creates a clear paper trail showing the flow of funds. The advice goes beyond the basic IRS information by providing specific documentation templates and walking through exactly how to report everything on your tax forms. In your grandparents situation, it would show you how to properly claim the credit since the 1098-T is in your name, regardless of who made the payment.

How does this actually work? I don't understand how a third-party service can get you through to the IRS faster than calling directly. Sounds too good to be true.

Yeah right. I've been trying to reach the IRS for months about my amended return. No way some random service can magically get through when millions of people can't. Probably just pays people in call centers to pretend they're IRS agents.

It's actually pretty straightforward how it works. They use an automated system that navigates the IRS phone tree and waits on hold for you. When they finally reach a real person, you get a call connecting you directly to that agent. No magic, just technology saving you from the hold time. They definitely connect you with real IRS agents. I confirmed this because the agent had access to my specific tax records and previous filings when I verified my identity. No call center employee could possibly have that information. The IRS agent even explained that they've been seeing more calls coming through this service lately.

That's actually a really good idea I hadn't thought of! We definitely want to make sure they're not losing out after being so generous. Do you know if there would be any gift tax implications if we did this? Or is it just considered paying them back?

No gift tax concerns here! For 2025, you can gift up to $18,000 per person without even having to report it (that's the annual exclusion amount). So if both you and your spouse each give your in-laws $2,500, you're well under that limit. And technically, this wouldn't even be considered a "payback" in the tax sense - it's just a gift from you to them, completely separate from their gift to you for tuition. The IRS doesn't track the motivations behind gifts, just the amounts.

Unfortunately, paying the school directly doesn't change who can claim the education credits. The IRS looks at who claims the student as a dependent, not who paid the expenses. What's interesting though is that payments made directly to an educational institution for tuition don't count toward the annual gift tax exclusion limit. So your parents could pay $50k directly to your school and it wouldn't count as part of their $18k annual gift limit to you. But they still can't claim the education credit unless they claim you as a dependent.

This is really helpful perspective, thanks! I'm definitely leaning toward the approach of sharing the credit benefit with my in-laws. It feels like the right thing to do since they were so generous. Quick question - do you happen to know if graduate school expenses qualify for the American Opportunity Credit, or would we be limited to the Lifetime Learning Credit? I've seen conflicting information online and want to make sure I'm calculating the potential benefit correctly before talking to my in-laws about this arrangement. Also, did you end up doing anything special documentation-wise when your parents paid your law school tuition, or did you just claim the credit normally on your return?

Great question! For graduate school, you'll be limited to the Lifetime Learning Credit since the American Opportunity Credit only applies to the first four years of undergraduate education. The LLC gives you 20% of up to $10,000 in qualified expenses, so with your $12,450 in tuition, you'd max out at the $2,000 credit (assuming your income is below the phase-out limits). As for documentation, I kept it pretty simple - I just claimed the credit normally on my return using the 1098-T. The IRS doesn't require special paperwork showing who paid, just that you had qualified expenses and weren't claimed as someone else's dependent. I did keep records of my parents' payment (bank statements showing the transfer to the school) in case of an audit, but that's just good record-keeping practice. The approach of sharing the benefit with your in-laws sounds perfect - they'd essentially get back the $2,000 credit amount, which helps acknowledge their generosity even though they can't claim it directly themselves.

This is really helpful information, thank you! As someone new to filing taxes after getting married, I'm learning so much from this thread. One thing I'm still confused about - you mentioned keeping documentation of the in-laws' payment "just in case." What exactly would trigger the IRS to ask for this documentation? Is it just random audits, or are there specific red flags that might make them question who actually paid the tuition expenses? Also, I'm curious about the income limits for the Lifetime Learning Credit. My spouse and I are both working now, so I want to make sure we're not going to phase out of the credit entirely before we start planning to share any benefit with family members.