When Must an Education Credit Be Repaid (Recaptured)

posted Feb 20, 2012, 5:31 PM by Wayne Culp   [ updated Feb 20, 2012, 5:31 PM by Wayne Culp ]

See Pub 970, pages 16 and 25

If, after a tax return is filed and the taxpayer receives tax-free educational assistance for, or a refund of, an expense used to figure a prior year American Opportunity Credit or Lifetime Learning Credit, the taxpayer may have to repay all or part of the credit.  This may be indicated when an amount is reported on the current year “Form 1098-T, Box 4. Adjustments made for a prior year” reports. 

The education credit(s) for the prior year must be refigured as if the assistance or refund was received in the prior reported year.  Subtract the amount of the refigured credit from the amount of the credit claimed in the prior year tax filing.  The result is the amount to be repaid.  In Taxwise, the repayment (recapture) is manually added to the tax liability on:

Form 1040 page 2, Line 44 Education Credit Recapture Amount (last line of the line 44 amounts)

The original (prior year) tax return does not change.


Example.  Taxpayer paid $7.000 tuition and fees in August 2010, and the student began college in September 2010.  The taxpayer filed their 2010 tax return on February 15, 2011 and claimed an American opportunity credit of $2,500.  After the return was filed, they received a refund of $4,000.  They must refigure their 2010 American opportunity credit using $3,000 of qualified education expenses instead of $7,000.  The refigured credit is $2,250.  In Taxwise manually include the difference of $250 in the Form 1040 page 2, Line 44 Education Credit Recapture Amount.