Refund of 2025 tuition paid in 2024/recapture of AOTC

[kbda]

Parents paid $6000 in tuition in December 2024 for spring semester 2025. In January 2025, the college awarded a scholarship in the amount of $6000 for spring semester 2025 and refunded the $6000 that parents had paid in Dec 2024. 

According to IRS publication 970, if the student received the refund prior to filing the 2024 return, the qualified education expenses for 2024 should be reduced by this amount.  "If anyone receives a refund after 2024 of qualified education expenses paid on behalf of a student in 2024 and the refund is paid before you file an income tax return for 2024, the amount of qualified education expenses for 2024 is reduced by the amount of the refund."

I would assume that in 2026, this refunded amount will appear in Box 4 of the student's 1098-T, which means the student and parent may need to adjust their 2024 taxes if any portion of this $6000 was used to claim the AOTC for 2024.  Hence, I'm initially thinking the student and parent should not include this $6000 payment towards calculation of AOTC for 2024.

However, this requirement to reduce 2024 QEE by a refund received in 2025 is directly contradicted by the TIP on page 15 of IRS publication 970, which states "If you pay qualified education expenses in both 2024 and 2025 for an academic period that begins in the first 3 months of 2025 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2025 instead of reducing your expenses for 2024." 

The student had qualified educational expenses in 2024 and also in 2025.  Does the option to reduce QEE for 2025 instead of 2024 apply if the student already received the refund prior to filing the 2024 tax return? Can the student (and parents) CHOOSE whether or not to calculate the AOTC for 2024 using the fees paid in 2024 toward spring semester tuition or are they REQUIRED to reduce the qualified education expenses for 2024 by the amount of the refund if the refund is received prior to filing the 2024 return? Can the family choose to simply follow the publication tip to apply the $6K tuition paid in December 2024 towards the 2024 AOTC, then simply reduce the 2025 QEE by this same $6000 when filing the 2025 return in 2026? 

[AmyC]

Let's look at the facts.

You paid $6,000 in December for tuition

Student received $6,000 scholarship in 2025

The unknown:

Were there any stipulations that the scholarship had to be used for tuition? Otherwise, the scholarship could be used towards room and board or other education related expenses. Even if the student lives at home, there are room and board expenses. The college may publish expected expenses. The IRS has a great brochure that explains how scholarships and tax credits interact.

The chances are high that you qualify for the 2024 education credit and the scholarship may end up just being income to the student or have no impact. 

Remember, it is better to let the student have $6,000 of taxable income next year- which is way below the filing and taxing limit AND for you to have $2,500 in your pocket for the credits now. 

[kbda]

Thank you for the reply. The scholarship awarded in January 2025 was a tuition scholarship, so it could actually make a difference if the IRS requires us to reduce the amount of 2024 QEE by the amount of the scholarship.  I'm not sure how the school's 1098-t that will be issued in 2026 will document this situation, however. Maybe the $6K tuition scholarship might simply be listed with the 2025 scholarship total since the scholarship was actually awarded in 2025 for a term beginning in Jan 2025? Maybe it doesn't matter since there were additional expenses paid in 2024 (required fees of $1600 paid in 2024 that were not covered by scholarship, as well as books, laptop, and other supplies that qualify as QEE.) 

Regardless, I'm thinking that the phrasing of the IRS tip in publication 970, implies that we could choose to reduce our QEE for 2025 instead of 2024, unless I am misreading this section. 

"If you pay qualified education expenses in both 2024 and 2025 for an academic period that begins in the first 3 months of 2025 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2025 instead of reducing your expenses for 2024." 

Am I understanding the IRS tip correctly that we can choose whether to reduce QEE in 2024 or 2025 in this situation? If so, I think we will go ahead and claim the full AOTC for 2024. If not, we will go ahead and reduce the QEE by $6K for 2024, which will still leave us eligible for a partial AOTC.

[kbda]

Looking at this in more detail, I just realized that the greater impact will be on the student's return.  Does the STUDENT also have the option of following the IRS tip listed in publication 971 and reporting the tuition-only scholarship awarded in Jan 2025 on their 2025 return instead of 2024? Or does this option only apply to the PARENTS, e.g., for purposes of claiming the AOTC? Since the student worked part-time in 2024, that extra $6K would push them above the threshold for filing both the federal and state taxes.

[AmyC]

Parents and students have the option to allocate the scholarship received when it isn't for 2024. The information goes on the person claiming the student exemption. The income is effectively moved to the other year.