 It's called the credit recapture. They're recapturing your credit like a lion that they put in a cage. So if any tax-free educational assistance for the qualified education expenses paid in 2022 or any refund of your qualified education expenses paid in 2022 is received after you file your 2022 income tax return you must recapture repay any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2022 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then figure your education credits for 2022 and figure the amount by which your 2022 tax liability would have increased if you had claimed their refigured credit. So in other words you what are you going to do you could go back in a min 2022 but that would be kind of a pain you don't really like to do that so we want to fix it in tax year 2023 so we can go back and try to say okay what would be the difference in my taxes in 2022 had I adjusted it and and removed these expenses how much lower would my lifetime learning credit be and the impact on whatever else impact on the tax return and you could just figure that and instead of filing an amended tax return for that difference possibly include the amount as an additional tax for the year the refund or tax-free assistance was received so you include it in 2023 instead of amending it possible other alternative if you're filing for a lifetime learning credit in 2023 as well you would think it would be rational to to try to adjust your expenses in 2023 for the refund that you got in 2023 so that would be like a reasonable kind of thing to do but a lot of times people might not be filing for a lifetime learning credit in 2023 because they didn't go to school in 2023 when they did in 2022 and therefore you're left with either amending 2022 or doing this recapture situation example you pay 9300 tuition and fees in December 2022 and your child began college in January 2023 you file your 2022 tax return on February 14th 2023 and claimed a lifetime learning credit of $1,860 you claimed no other credits after you filed your return your child withdrew from the two courses and you received a refund a little ingrate i told you to go i'm paying for this thing here for crying out you said you wanted to you said you wanted to go to school you dropping out like whatever anyways after you file your return your child withdrew from two courses and you received a refund of $2,900 you must refigure your 2022 lifetime learning credit using $6,400 education expenses instead of $9,300 so the refigured credit is $1,280 and your tax liability increased by $580 so you're gonna say okay i'm gonna refigure my taxes without these expenses it comes out to a $580 difference and then you can see the instructions for 2023 income tax return to determine where to include this tax in other words you got to figure out where to add it to the taxes as like another an added tax like an other tax on the form 1040 all right amounts that don't reduce qualified education expenses don't reduce qualified education expenses by amounts paid with funds the students received as payment for services such as wages because those are included in income alone that's not the same thing as a grant or something because you're gonna have to repay the loan so it's you still a gift is something that was gifted to you so that's not the same thing as like a grant or something like it's free money but it's a gift situation rather than like a grant or something like that and inheritance so again that's similar to a gifting type of situation except the individual died and when they died they might have even been subject to the death tax or a state's tax so so you shouldn't have to be anyways a withdrawal from the student's personal savings so clearly a withdrawal from the savings isn't free money you would expect because you got that somehow with a gift inheritance or you earned it or something so don't reduce the qualified education expenses by any scholarship or fellowship grant reported as income on the student's tax return in the following situations so the use of the money is restricted by the terms of the scholarship or fellowship grant to costs attendance such as room and board other than qualified education expenses as defined in qualified education expenses in chapter one the use of the money money isn't restricted so once again don't reduce the qualified education expenses by any scholarship or fellowship grant reported as income meaning usually you have the grant and if it's tax-free then you already got a benefit you got in essence the equivalent of a deduction it wasn't included in income but if you're paying taxes on it then then you might be able to the expenses that you pay for with that money possibly could be something that could go towards the the expenses you would think for the lifetime learning credit