The situation of needing to recapture an education expense, deducted on Federal Schedule A in a prior year as an unreimbursed employee expense, in the current year is not specifically addressed in IRS Publication 970, Tax Benefits for Education. However, they do explain how to handle a similar situation when you take an education deduction or credit on the original return. We would expect the IRS would want this handled as if you took an education deduction; you may wish to verify this issue with the IRS by calling 800-829-1040.

The amount in Box 4 of Form 1098-T means an adjustment for a recapture may need to be made on your current year tax return.

Education Expense Claimed on Schedule A as an Unreimbursed Employee Expense:

If you claimed the educational expenses as an expense on line 4 of Federal Form 2106 (which transfers to line 21 of Federal Schedule A and then to line 27 after the limitation of 2% of AGI is subtracted on line 26), you would need to recalculate the Schedule A to determine the reduction in itemized deductions that would have been allowed in that year based on the changed education expense.  You then would claim that amount as income on the current year’s Federal Form 1040, line 21.

Note. The amount of the expense to recapture is NOT the adjustment amount from the Form 1098-T, but rather the difference between the itemized expense allowed on line 27 of Federal Schedule A as it was originally calculated and the recalculated amount once the adjustment has been made to the tuition expense on the prior year return.  You may find it helpful to review a copy of your prior year’s Schedule A and then fill out a revised copy using updated figures. CLICK HERE to print a blank prior year Schedule A from the IRS website to assist you in this process.

To make the entry to report the adjustment on Line 21 of the current year’s Federal Form 1040 as Other Income:

1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
2. Click Other Income in the Federal Quick Q&A Topics menu to expand the category and then click Prizes, awards or other miscellaneous income
3. Enter the recapture amount you have calculated in the box Recapture of prior year tuition and fees deduction as the same philosophy would apply to the recapture of prior year educational expenses deducted on Federal Schedule A.