I'm starting a new thread on this, because I found the issue interesting...
Because textbooks and other course materials are now qualifying educational expenses for the American Opportunity Credit, someone raised the question in an earlier thread as to what happens when college students later sell their textbooks, and effectively recover part of the cost.
The question, although not presented in exactly these words, seems to be whether the sale of the books would trigger a partial recapture of the education credit.
My working hypothesis is that it would not.
According to Pub. 970, recapture of the credit is required when "you receive tax-free educational assistance for, or a refund of, an expense you used to figure [an education] credit on that return."
Even if the student sells the books back to the school, I don't see the transaction as a refund. The amount the student gets for the books has no relationship to what she originally paid. The school purchases the books at FMV for used books. Some books cannot be sold back, because they are no longer in use, or there is insufficient demand. And in many cases, students purchase books, and then sell them, to and from parties that have no connection to the school.
Selling the books after they were used to figure a tax credit may indeed be some sort of recovery, but I don't think it is the type that triggers a recapture of the credit. Recapture of the credit is meant to address things such as an employer reimbursement of tutition, or a scholarship that was somehow delayed, and not paid until the following calendar year.
At least in theory, the recovery that arises when the books are sold may in fact have some tax consequences, but I don't think it would be a recapture of the credit.
It would be something else.
Suppose you take a deduction on Schedule A for durable medical goods, such as a wheelchair...
Then, the following tax year, you get reimbursed for it by your insurance company. That seems to be a cut-and-dried recovery. I believe there is a discussion of this type of recovery somewhere in Pub. 17. It generates taxable income. But it can get really complicated really fast, because sometimes only part of the recovery is taxable. This is the very same issue that arises in the mind-bending worksheet that deals with the state tax refund.
The insurance reimbursement for the wheelchair is like the employer reimbursement of tuition. The reimbursement effectively means that the expense never should have been used to claim a tax benefit to begin with.
Selling the books is different. Students have no way of knowing whether they will be able to sell the books, or how much they will get for them. Selling the books is more like... well, it's more like selling the wheelchair.
Suppose there was never an insurance reimbursement for the wheelchair, and the expense is properly claimed on Schedule A. Then, after a year and half, you don't need the wheelchair anymore... and you sell it on e-bay or Craigslist.
Hmmmmm?
Here are my thoughts so far:
The wheelchair, and the textbooks, are capital assets. In most cases, when capital assets such as furniture, clothing, toys, books, and kitchen utensils are sold at garage sales, or on e-bay, they are sold at a loss. And this is certainly the case with the college textbooks. They are almost certainly sold for less than what the student paid for them.
But is there really a capital loss?
What is the student's basis in the books?
Is the basis zero, because the cost was deducted as an expense?
Well, not exactly... The cost was not fully expensed as it would be on a Schedule C. The cost of the books was used to figure the education credit. But the credit is only a percentage of the cost.
Soooo... does the basis have to be reduced by the amount of the tax benefit that was received? If so, this brings us back to the complex calculations that are used to determine what portion of a state tax refund is taxable income.
This is really a hoot. Maybe I'll start asking my clients, just for fun...
Did you sell anything last year that you took a tax deduction or credit for in an earlier year?
Talk about deer in the headlights.
BMK
Because textbooks and other course materials are now qualifying educational expenses for the American Opportunity Credit, someone raised the question in an earlier thread as to what happens when college students later sell their textbooks, and effectively recover part of the cost.
The question, although not presented in exactly these words, seems to be whether the sale of the books would trigger a partial recapture of the education credit.
My working hypothesis is that it would not.
According to Pub. 970, recapture of the credit is required when "you receive tax-free educational assistance for, or a refund of, an expense you used to figure [an education] credit on that return."
Even if the student sells the books back to the school, I don't see the transaction as a refund. The amount the student gets for the books has no relationship to what she originally paid. The school purchases the books at FMV for used books. Some books cannot be sold back, because they are no longer in use, or there is insufficient demand. And in many cases, students purchase books, and then sell them, to and from parties that have no connection to the school.
Selling the books after they were used to figure a tax credit may indeed be some sort of recovery, but I don't think it is the type that triggers a recapture of the credit. Recapture of the credit is meant to address things such as an employer reimbursement of tutition, or a scholarship that was somehow delayed, and not paid until the following calendar year.
At least in theory, the recovery that arises when the books are sold may in fact have some tax consequences, but I don't think it would be a recapture of the credit.
It would be something else.
Suppose you take a deduction on Schedule A for durable medical goods, such as a wheelchair...
Then, the following tax year, you get reimbursed for it by your insurance company. That seems to be a cut-and-dried recovery. I believe there is a discussion of this type of recovery somewhere in Pub. 17. It generates taxable income. But it can get really complicated really fast, because sometimes only part of the recovery is taxable. This is the very same issue that arises in the mind-bending worksheet that deals with the state tax refund.
The insurance reimbursement for the wheelchair is like the employer reimbursement of tuition. The reimbursement effectively means that the expense never should have been used to claim a tax benefit to begin with.
Selling the books is different. Students have no way of knowing whether they will be able to sell the books, or how much they will get for them. Selling the books is more like... well, it's more like selling the wheelchair.
Suppose there was never an insurance reimbursement for the wheelchair, and the expense is properly claimed on Schedule A. Then, after a year and half, you don't need the wheelchair anymore... and you sell it on e-bay or Craigslist.
Hmmmmm?
Here are my thoughts so far:
The wheelchair, and the textbooks, are capital assets. In most cases, when capital assets such as furniture, clothing, toys, books, and kitchen utensils are sold at garage sales, or on e-bay, they are sold at a loss. And this is certainly the case with the college textbooks. They are almost certainly sold for less than what the student paid for them.
But is there really a capital loss?
What is the student's basis in the books?
Is the basis zero, because the cost was deducted as an expense?
Well, not exactly... The cost was not fully expensed as it would be on a Schedule C. The cost of the books was used to figure the education credit. But the credit is only a percentage of the cost.
Soooo... does the basis have to be reduced by the amount of the tax benefit that was received? If so, this brings us back to the complex calculations that are used to determine what portion of a state tax refund is taxable income.
This is really a hoot. Maybe I'll start asking my clients, just for fun...
Did you sell anything last year that you took a tax deduction or credit for in an earlier year?
Talk about deer in the headlights.
BMK
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