There are several different type of education tax credits available to taxpayers and/or their dependents. However, when a taxpayer (or dependent) receives a refund of qualified education expenses, it reduces the adjusted qualified education expenses that the taxpayer has in a specific tax year. As a result, a refund of qualified education expenses may require the taxpayer to repay (recapture) an education credit (American Opportunity Credit or Lifetime Learning Credit), or for tax years 2020 and prior the Tuition and Fees Deduction, that was claimed on a prior year tax return if it was based on the higher pre-refund qualified education expenses.
Qualified education expenses may be refunded in several scenarios:
- A student reduces their course load after paying their tuition and/or fees and then receives a refund of some or all of the amount paid.
- A student receives additional grants or scholarships that get applied towards their qualified educational expenses after the taxpayer paid the expenses and claimed a credit for the expenses.
- An adjustment is reported in box 4 of Form 1098-T related to the amount reported on the prior year Form 1098-T, reducing the credit that could have been claimed in the prior year thus resulting in an increase in tax liability in the tax year of the refund.
The repayment (or recapture) amount is determined as follows:
- Determine the amount of the adjusted qualified education expenses that the taxpayer had for the year the credit was originally claimed. This is done by reducing the original education expenses by the amount of the refund and/or the additional tax-free educational assistance that was subsequently reported in Form 1098-T Box 4.
- Re-calculate the education credit for the prior year using the reduced education expenses.
- Determine the amount by which the tax liability would have increased if the taxpayer had claimed the re-calculated credit.
Include the amount the tax liability would have increased as an additional tax in the year the refund or additional tax-free assistance was received.
See IRS Publication 970 and the Form 8863 instructions for information on reporting a reduction in the education credit or (for tax years 2020 and prior) the tuition and fees deduction.
To report the additional tax in TaxSlayer Pro, from the Main Menu of the tax return select:
- Tax Computation
- Total Other Taxes
- Tax from Recapture of an Education Credit - Enter the tax liability difference as calculated above.
The amount entered will be included in the tax on Form 1040, and the amount of the additional tax from the recapture of the education credit will print at the top of Form 1040 page 2 notated "ECR".
In the event that Form 1098-T Box 6 shows an adjustment to scholarships or grants for a prior year, this adjustment amount may also affect the amount of any allowable education credit (or for tax year 2020 and prior, tuition and fees deduction) that was claimed for the prior year if it shows that the scholarships or grants reported in a prior year have been reduced. However, in order to claim an additional education credit for the prior year, the taxpayer would have to file an amended income tax return (Form 1040-X) for the prior year. See IRS Publication 970 and the Form 8863 instructions for more information.
Note: This is a guide on entering the additional tax due to the recapture of an education credit in the TaxSlayer Pro program. This is not intended as tax advice.