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. https://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.
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    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.
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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?
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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.
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I hope that helps.

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

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