![]() 25A- 5(c)(3) gives students an opportunity to increase their education credits by allowing them to apply their scholarship or grant to expenses other than qualified education expenses. 117 except to the extent the scholarship or fellowship grant (or any portion of it) may or must be applied, by its terms, to expenses other than qualified tuition and related expenses (such as room and board), and the student reports the grant (or the appropriate portion of it) as income on the student's return, if the student is required to file a return. 25A- 5(c)(3) provides that scholarships and grants are to be treated as excludable from taxable income under Sec. However, just because any nontaxable scholarship or grant can be applied to qualified education expenses when calculating education credits does not necessarily mean it must be applied. 117(b)(1), in general, the term "qualified scholarship" means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, the amount was used for qualified tuition and related expenses. 117 provides that gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization as defined for purposes of the charitable contribution deduction in Sec. 117 and certain other excludable educational assistance. For this purpose, tax- free education assistance means a qualified scholarship that is excludable from income under Sec. 25A- 5(c)(1) provides that, in determining the amount of an education tax credit, qualified tuition and related expenses for any academic period must be reduced by the amount of any tax- free educational assistance allocable to that period. There is no limit on the number of years the student can claim the credit. ![]() Eligible students enrolled in courses at an eligible college, university, vocational school, or other postsecondary institution (including courses to acquire or improve job skills) can claim the lifetime learning credit. Thus, a maximum credit of $2,000 is available to qualifying students. The lifetime learning credit ("LLC" in the accompanying tables) offers a credit for 20% of up to $10,000 in qualified education expenses.The American opportunity tax credit is limited to a student's first four years of higher education. The available credit is 40% refundable (i.e., up to $1,000). The American opportunity tax credit ("AOTC" in the accompanying tables) offers a credit for 100% of the first $2,000 in qualified education expenses and an additional 25% on the next $2,000, for a combined maximum tax credit of $2,500.This strategy can significantly affect the tax outcome of a taxpayer, as both education credits provide significant tax benefits: Similar instructions can be found in IRS Publication 970, Tax Benefits for Education. The scholarship or fellowship grant must be one that may (by its terms) be used for expenses other than qualified education expenses (such as room and board). You may be able to increase an education credit and reduce your total tax or increase your tax refund if the student (you, your spouse, or your dependent) chooses to include all or part of certain scholarships or fellowship grants in income. The instructions to Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), summarize this strategy, stating: This article explores a tax strategy of electing to include in gross income certain otherwise excludable scholarships or grants to, in certain cases, maximize the net tax benefit from these education credits. The American opportunity tax credit and lifetime learning credit may seem to involve straightforward calculations however, there is more to them than meets the eye.
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