Education Paid by Insurance

Today TaxMama hears from Angela in Los Angeles, who tells us. “My friend got a form 1098-T . There is an entry of $11,200 in box 10 of her 1098-T. She has about $3,000 income from W-2. She is afraid to do her tax return because she thinks that amount from Box 10 of 1098-T is income. Is this true ?”

Dear Angela,

Hmmm…looking at the 2008 Form 1098-T, box 10, that’s the box for insurance reimbursements paid towards tuition and related expenses. http://www.irs.gov/pub/irs-pdf/f1098t.pdf

    Box 10. Shows the total amount of reimbursements or refunds of qualified tuition and related expenses made by an insurer. The amount of reimbursements or refunds for the calendar year may reduce the amount of any education credit you can claim for the year.

I would want to find out the source of the insurance reimbursements. Then, thinking of the rules related to gifts – payments made directly to an educational institution are exempt from gift tax. So I suspect that there’s no income here. You may not need to put that amount anywhere.

The $11,200 will reduce the rest of her tuition expenses to wipe out any education credit she could get. Though, with only $3,000 of wages, she won’t have any taxes at all – if this is her only income.

However, I would want to look at that insurance source. If an insurance company is paying for her education, what other money is it paying her? And for what? Get a look at the source of the settlement.

If she had a major physical injury and is receiving annual payments, there probably isn’t a taxable component. But, the insurance may be paying her for lost wages or other taxable compensation. I suspect that’s her real concern – not the amount in box 10. I hope that helps.

And remember, you can find answers to all kinds of questions about education and other tax issues, free. Where? Where else? At TaxMama.com

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