Are COVID Refunds From Colleges Taxable?
COVID 19 has brought the world to a halt. Students aren’t able to go to colleges and parents are hoping to get a fee refund. While many colleges are trying to compensate by offering online classes, others are offering partial refunds.
When it comes to refunds, it’s important to be aware of the tax liabilities that need to be taken care of.
Extension Of Tuition And Fees Deduction
Regarding the tuition and fees deduction, a person can deduct as much as $4,000 from his or her taxable income. This amount is used towards one’s education as well as a spouse’s or anyone dependent on the person.
The tuition and fees deduction is now extended to claim for expenses made in the years 2018, 2019, and 2020. You can now claim this amount for qualified education expenses that have been paid either in the 2019 academic year or in the first three months of 2020.
The condition stipulates that you can only claim this amount for expenses on qualified education if it’s not refunded. Hence, if you haven’t received a refund from the college, you’ll be eligible for the tax refund.
The Lifetime Learning Credit
Similar to the Tuition and Fees Deduction, the Lifetime Learning credit also offers you an amount of up to $2,000 for the expenses of qualified education paid for by yourself or by someone dependent on you. Now that many colleges are providing partial refunds, the chances of getting this refund have narrowed down. Also, there can be chances that you may get penalized while claiming it.
One of the best ways to handle this is to deposit this refunded amount into a 529 account so that you can claim the Lifetime Learning credit as your savings while you are claiming tax savings. If the student withdraws from the program due to a COVID situation, you can contribute the refunded amount to the 529 plan and stay safe from paying a 10% penalty.
American Opportunity Credit
The American Opportunity Credit provides students with a sum of $2,500 on the tax return claimed. This is also based on qualified higher education for yourself or anyone dependent on you. Another great advantage is that it’s also partially refundable. The credit can be claimed for expenses that have been made in the initial academic semester of 2019 or the first trimester of 2020. However, you need to make sure that you can only claim it if the expenses haven’t been refunded by the college after the student has withdrawn from the program.
Getting such a refund after a claim can help individuals in lessening down the burden of the current tax year. Hence, it’s important to arrange things accordingly. If you receive a refund from the college, you should deposit it into the 529 plan immediately.
Refund Conditions
There can be different reasons why students ask for refunds from the colleges. Colleges and universities have been very clear that students who are taking online classes shouldn’t expect any kind of refund of fees. However, there are three ways you can receive refunds from colleges.
- You can expect a refund from the college if they’ve canceled the course before the commencement of the session
- You can expect a partial refund from the college if they’ve canceled the course after the commencement of it or if it’s already covered a few modules
- The student can also withdraw from the course based on medical grounds
If you’ve received this refund recently after 2019, you can redeposit this refunded amount into the 529 account plan of the beneficiary so that you don’t get penalized.
Look At Your Source Of Funds
It’s important to pay attention to your source of funds so that you can invest this amount into higher education for your children or someone dependent on you. Look around for other options that provide the same courses and that also offers online classes so you don’t have to halt your education.
Once you receive a refund from the college, redeposit it into your 529 account so that you can claim it while claiming your tax returns. This is how you can claim tax returns in 2019 and use it to further your education. Therefore, redepositing a college refund can help you in sourcing funds for another academic year.
Bottom Line
Parents are becoming anxious about how colleges aren’t able to provide classes but are still charging them. However, there are some universities providing refunds if they’re not able to conduct online classes. Therefore, it’s important to contact your school and ask for more clarity. Most importantly, once you’ve received a refund, make sure to use it carefully to further finance your degree.
