Education Credit/Deduction -- Recapture

[Bill Tubbs]

Client enrolled in course series to get teacher certification. At the time of the expenditures for tuition, it was possible that some reimbursement would be issued -- including one by her employer (she was teaching under an emergency credential but had to do this course series to get her regular license). Since the reimbursement was far from a certainty, we deducted the tuition as it was paid.

Spent $4000 in 2003 for which we applied all to Lifetime Learning Credit.
Spent $6000 in 2004 for which we could deduct $4000 under Tuition & Feeds Deduction (25% tax bracket).

Completed the course in early 2005, and then in 2005 received reimbursements:
$3750 from employer (as an expense reimbursement; no affect on W-2)
$2500 from CESA (Cooperative Education Service Agency) and a 1099-Misc

So, total reimbursements of $6250 received (62.5%). I figured one "safe" way of allocating it is to figure 62.5% of the 2003 LLC be recaptured, and then $1750 of the Tuition/Fees Deduction (6000 * 37.5% = 2250 pd out of pocket, not the $4000 originally deducted).

But, would there be any valid argument to allocate the $6250 reimbursements in this order:
1) the $2000 that could not be deducted in 2004
2) the $4000 applied to the LLC credit in 2003 (20% tax savings))
3) the remaining $250 applied to the Tuition/Fees deduction in 2004 (25% tax savings)
This would yield the minimum tax increase on the 2005 return.

Any thought on the allocation of reimbursement?

Bill

[Snaggletooth]

Wouldn't have even asked

Bill, I guess I wouldn't have even asked unless the client volunteered the information.

I don't think that's part of our job, unless we have been made aware that there has been a reimbursement, or if in the year taken we had reason to believe there was a potential for a credit. I don't ignore these things if I run into them, but I certainly don't look under rocks to find them either.

What about filing an amended return for the year of the credit, rescinding the adjustment/credit and paying BACK the tax? and not to hockey up the current year return? Would that be more appropriate? Or is that against the "cash basis" considered to be incumbent on all individual taxpayers?

Good question, Bill, and hope it gets more posts.

[Bill Tubbs]

above board...

Bill, I guess I wouldn't have even asked unless the client volunteered the information.

Client wasn't sure in 2003 & 2004 what to do because a reimbursement was possible. She had taken other courses in prior years which were 100% reimbursed and knew no reporting was necessary on those, but when 2003 came along she wasn't sure whether to claim or not.

With one of the reimbursements coming on a 1099-Misc this year, it also would've been hard for client to NOT provide the info. But, she would have been upfront anyhow -- knowing that she now claimed too much in prior years -- fair is fair.

What about filing an amended return for the year of the credit, rescinding the adjustment/credit and paying BACK the tax? and not to hockey up the current year return? Would that be more appropriate? Or is that against the "cash basis" considered to be incumbent on all individual taxpayers?

It's easier to put the adjustments on 2005 return, and (because of "Cash basis") also the correct way. Besides, if I were to amend the prior year returns, there would also be 1 or 2 years of interest due.

Since I originally created this thread, I started comparing this tuition reimbursement to a student who receives scholarships. If the $6250 received had been scholarship, then we would have deducted $3750 (10k-6250). So, now I plan to treat the reimbursement in a similar fashion, and say $2000 of the reimbursement was for the amount not deducted in 2004, then $4000 of reimbursement was for 2003, and the last $250 of reimbursement was against the amount deducted in 2004 (best outcome for client -- at least for federal -- need to play around with numbers as there is some state consideration).

So, I think I convinced myself that I can go the best route for the client. Any dissenters?
Bill

[Koss]

1099-misc?

Completed the course in early 2005, and then in 2005 received reimbursements:
$3750 from employer (as an expense reimbursement; no affect on W-2)
$2500 from CESA (Cooperative Education Service Agency) and a 1099-Misc

Which box was used on the 1099-MISC?

If they used Box 7, and this is truly a reimbursement of tuition paid by the taxpayer, then the issuance of the 1099-MISC is flat-out wrong, and your client should politely escalate the matter as high as necessary to get it corrected. Or else you'll need to attach an explanation to the return, because Box 7 is presumed to be self-employment income in the absence of any indication to the contrary.

I'm not convinced that it is ever appropriate to issue any type of 1099 for any type of reimbursement. I might entertain an argument for the use of Box 3.

Box 3, I believe, can be used in some cases to report a taxable scholarship. But that's very different from a tuition reimbursement.

None of this answers your original question as to how to calculate the recapture. I'm interested enough in this that I'm going to try to find an answer. But it's not really a recapture if the funds aren't really a reimbursement of an amount used in an earlier year for a credit or deduction. The question of how the item is treated by the reporting party is extremely important.

Burton

[Bill Tubbs]

Box 7

Which box was used on the 1099-MISC?

If they used Box 7, and this is truly a reimbursement of tuition paid by the taxpayer, then the issuance of the 1099-MISC is flat-out wrong, and your client should politely escalate the matter as high as necessary to get it corrected. Or else you'll need to attach an explanation to the return, because Box 7 is presumed to be self-employment income in the absence of any indication to the contrary.

The $2500 was in Box 7. I was just planning on adding $2500 to Other Income, then another line reversing out the $2500 with a short explanation, then adding back whatever recapture amount. Figure if the IRS wants to send a letter later on, that I'd be more than happy to answer the letter then in more detail.

I've had incorrect 1099's issued in the past and just attached a note or answered a letter later instead of even trying to get the 1099's corrected. Hasn't been a big deal at all. Client is also my sister, so if they get a letter, they'll just pass it on to me.

Note, I'm putting the recapture for Tuition/Fees Deduction on Form 1040, Line 21 "Other Income", and the recapture of the Lifetime Learning Credit on Form 1040, Line 55.

Bill

[BP.]

Have you had a look yet at pub 525? Pretty involved discussion there on how to report reimbursements (recoveries) for items previously used for deduction or credit.