Education credits are based on the expenses paid in the tax year (Box 1).
The 1098-T does not always tell the whole story.
If a scholarship pays in the following calendar year, you need to subtract that amount from the expenses you claim (as well as subtracting the amount of box 5 from box 1 if applicable) OR allocate it to expenses for the following year (the year it is received).
ACCORDING TO THE IRS:
“Refunds. A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year.”
“Refunds received in 2019. For each student, figure the adjusted qualified education expenses for 2019 by adding all the qualified education expenses for 2019 and subtracting any refunds of those expenses received from the eligible educational institution during 2019.
Refunds received after 2019 but before your income tax return is filed. If anyone receives a refund after 2019 of qualified education expenses paid on behalf of a student in 2019 and the refund is paid before you file an income tax return for 2019, the amount of qualified education expenses for 2019 is reduced by the amount of the refund.
Refunds received after 2019 and after your income tax return is filed. If anyone receives a refund after 2019 of qualified education expenses paid on behalf of a student in 2019 and the refund is paid after you file an income tax return for 2019, you may need to repay some or all of the credit. See Credit recapture next.”
“Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2019 or any refund of your qualified education expenses paid in 2019 is received after you file your 2019 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2019 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2019 and figure the amount by which your 2019 tax liability would have increased if you had claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received.”
TurboTax can help you do this:
Type recapture education deduction into the search box located at the top right of the screen
Click on the “Jump to recapture education deduction” link
There are other factors involved when claiming education expenses, scholarships, and credits.
IRS Pub 970
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