Taxpayer Claimed American Opportunity Credit in Wrong Year, No Credit Allowed

Most tax professionals are fully aware that a tax benefit must be claimed in the specific year it is allowed and, generally, a taxpayer cannot pick and choose which year a benefit should be claimed in.  But taxpayers, even if they aren’t trying to game a system, may find it difficult to figure out which year a benefit should be claimed.

Such was the fate of the taxpayers in the case of Ferm v. Commissioner, TC Summary Opinion 2014-115.  In this case the taxpayer’s problem was attempting to claim the American Opportunity Credit [IRC §25A] for tuition paid for their daughter.

Under the general rule for cash basis taxpayers, a credit can only be claimed if the expenses are paid in the year in which an academic period begins.  [Reg. §1.25A‑5(e)(1)]   However, if the academic period begins in January, February or March of the following year, payments made in the prior year will be deemed to have been made in the year in which the academic period begins.  [IRC §25A(g)(4), Reg. §1.25A‑5(e)(2)(i)]

To illustrate the point, the regulations provide the following example:

In December 1998, Taxpayer A, a calendar year taxpayer, pays College Z $1,000 in qualified tuition and related expenses to attend classes during the 1999 Spring semester, which begins in January 1999. Taxpayer A may claim an education tax credit only in 1998 for payments made in 1998 for the 1999 Spring semester. [Reg. §1.25A‑5(e)(2)(ii)]

Unfortunately, the Ferms apparently did not read the above example, and this proved fatal in their attempts to claim the credit.  Of the total amounts paid for tuition for the spring semester of 2011, the vast majority was paid on December 28, 2010 per the college’s tuition statement for their daughter.

The problem, of course, is that the Ferms were asking for the credit on their 2011 return and not their 2010 return.  Even though the semester began in 2011, it commenced in January of 2011, bringing it under the special rule of IRC §25A(g)(4), noted above, that will push the credit date back into 2010 for any payments for that semester made in 2010.

The Court noted the unfairness of the result, stating:

We realize that 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 28, 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. Michaels v. Commissioner, 87 T.C. 1412, 1417 (1986).