How to Calculate Recapture of Education Credits

How to Calculate Recapture of Education Credits
Close-up of several income tax forms

Step 1

Figure out how much tuition you used to figure your original credit. If you claimed the Lifetime Learning Credit, you can find this number on line 4 of Form 8863 from last year. If you claimed the American Opportunity Credit, you can find the amount on line 1, column C of the same form.

Step 2

Find the amount that you received as a refund of tuition you originally used to claim the credit. If you received tax-free education assistance, you must consider that as a refund as well. For example, if you originally calculated your credit based on $4,000 of tuition you paid (which would be the amount you looked up for step 1) but you later received a tax-free grant of $1,000, you must calculate a recapture. See Internal Revenue Service Publication 970, page 23.

Step 3

Subtract the amount in Step 2 from the amount in Step 1. This is the amount of tuition that you should have originally used to claim your credit, had you known that you would receive the refund or tax-free assistance. In the example, you would subtract $1,000 from $4,000, giving you a remainder of $3,000.

Step 4

Recalculate the credit with the number from Step 3, using Form 8863 for last year, which you can obtain at IRS.gov. This will give you the amount you should have claimed originally. Continuing with our example, you'd refigure your credit using $3,000 as tuition paid. Using that figure, assuming that no other limitations exist, you should arrive at an American Opportunity Credit of $2,250 or a Lifetime Learning Credit of $600.

Step 5

Subtract the amount from Step 4 — the refigured tax credit — from the amount of the credit you claimed last year. You can find the amount you claimed by looking at line 31 of your 1040A or line 49 of your 1040 (it should be labeled "Education Credits"). In our example, you'd have claimed an American Opportunity Credit of $2,500 or a Lifetime Learning Credit of $800. If you subtract the corresponding amounts from Step 4 from each amount, you come up with a difference of $250 for the American Opportunity Credit or $200 for the Lifetime Learning Credit.

Step 6

Repay the amount from Step 5 to the IRS. In our example, that would be $250 or $200 depending on which credit you claimed. According to page 35 of the 1040 instructions, you add this to the tax liability on your current year form by writing "ECR" and the amount you owe back on the dotted line next to line 44 of the 1040 or line 28 of the 1040A (these lines should be labeled "tax"). Add the amount to the tax you calculated for this line. Please note that your original tax return does not change.