There are several different type of education tax credits available to taxpayers and/or their dependents. See Education Credits and Tuition and Fees Deduction. 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, Lifetime Learning Credit or Tuition and Fees Credit) that was claimed on a prior year tax return if it was based on the higher pre-refund qualified education expenses.
A refund of qualified education expenses can occur when 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. It can also occur if 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. Any adjustment made for a prior year for qualified tuition and related expenses that were reported on a prior year Form 1098-T will be reported in Box 4 of a subsequent year Form 1098-T. This adjustment amount may reduce any allowable education credit that was claimed for the prior year and may result in an increase in tax liability in the tax year of the refund.
The repayment (or recapture) amount is calculated by first determining 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 or additional tax-free educational assistance that was subsequently reported in Form 1098-T Box 4. Then re-calculate the education credit year for that prior year using the reduced education expenses and determine the amount by which the tax liability would have increased if the taxpayer had claimed the re-calculated credit. Include that calculated amount as an additional tax in the year the refund or tax-free assistance was received. See IRS Publication 970 and the Form 8863 instructions for information on reporting a reduction in your education credit or tuition and fees deduction.
To report this additional tax in TaxSlayer Pro, from the Main Menu of the tax return select:
- Tax Computation
- Tax from Recapture of an Education Credit - enter the calculated amount.
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 bottom 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 tuition and fees deduction or education credit 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 Tax from the recapture (or repayment) of an Education Credit into the TaxSlayer Pro program. This is not intended as tax advice.