Chapter 35 And Federal Education Credits

[flow1972]

Going through and assisting my son with his taxes yesterday, and I had to do a bunch of research on how Chapter 35 affects AOTC and/or LLC education credit.  It was astounding to me how many "experts" threw out answers about what a person could and could not do with regard to the education credits that were completely WRONG.  Here's the actual low-down for anyone who is confused:

Chapter 35 is NOT the GI Bill.  There is no benefit within Chapter 35 that is "required to be used for educational expenses".  Chapter 35 payments are the "equivalent" of BHA payments in the GI Bill program.  Most "States" offer a Tuition "waiver" or "reimbursement" for people who are eligible for Chapter 35; but that money does not come to the person "through" Chapter 35 or the VA.  

When discussing the Federal Education Benefits, you would absolutely file the 1098-T the school sends you.  What it will show is all fees and tuition "required to be paid directly to the institution" (Box 1)in order to attend.  It will also show all "grants" and/or "waived" Tuition paid by the State or any other benefit program.  (Box 5)

Most of the time, a Chapter 35 recipient will have a higher number in Box 1 than Box 5 since typically (unless receiving another grant/scholarship) includes the "other than Tuition" fees the school charges (i.e. labs, equipment, insurance of some sort, meal plans, etc...)

In that section of your taxes, you would enter the amounts the school shows in those boxes.  Then, you would enter any "additional eligible expenses" you incurred (i.e. books, etc..) required to attend but not required to be paid directly to the institution.  In my son's case, that would be over $700 (note:  parking/transportation is not an eligible expense).

Then, you will answer "Yes" to the question asking if you participated in a plan run by the VA.  In that section you would enter $0 for the amount of the money you got from the VA that was "required to be used for educational expenses" because the Chapter 35 payments are NOT required to be used for anything in particular.  They can be used for whatever the recipient deems necessary.  The only time you'd enter anything in that box would be if you received a payment from the VA that was SPECIFICALLY REQUIRED TO BE USED FOR AN EDUCATION EXPENSE.  This is usually something existing in GI BILL PAYMENTS FOR TUITION NOT CHAPTER 35 PAYMENTS.

Please don't lose tax benefits you or your dependents are eligible for due to really bad information given by some "expert" on the internet.

[broncovet]

Correct, and thank you.  Benefits paid to the Veteran are not taxable, and IRS says dont put those benefits on your tax return.  My accountant agrees.  

Source:  https://www.irs.gov/individuals/information-for-veterans

[Sgt. Wilky]

This is an excellent post. I just qualified for Chapter 35 benefits and received some paperwork in the mail from the VA for my (just turned) 16 y/o son. My accountant should be aware of this, but I will make sure to inform her that there some very specific rules regarding this benefit and the community college up the street from us should be able to help us with this too.

Thank you again and Semper Fi,

Sgt. Wilky