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• Lifetime learning credit: Qualified education expenses include amounts paid for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance. Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. However, fees for personal expenses (described below) are never qualified education expenses. Qualified education expenses don't include amounts paid for the following. • Personal expenses. This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. • Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills. You may receive Form 1098-T from the institution reporting payments received in 2021 (box 1). However, the amount in box 1 of Form 1098-T may be different from the amount you paid (or are treated as having paid). In completing Form 8863, use only the amounts you actually paid (plus any amounts you're treated as having paid) in 2021 (reduced, as necessary, as described under Adjusted Qualified Education Expenses, later). See chapters 2 and 3 of Pub. 970 for more information on Form 1098-T. Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. If you or the student takes a deduction for higher education expenses, such as on Schedule C (Form 1040), you cannot use those same expenses in your qualified education expenses when figuring your education credits. Any qualified expenses used to figure the education credits cannot be taken into account in determining the amount of a distribution from a Coverdell ESA or a qualified tuition program (section 529 plan) that is excluded from gross income. See Pub. 970, chapters 6 and 7, for more information. Prepaid Expenses Qualified education expenses paid in 2021 for an academic period that begins in the first 3 months of 2022 can be used in figuring an education credit for 2021 only. For example, if you pay $2,000 in December 2021 for qualified tuition for the 2022 winter quarter that begins in January 2022, you can use that $2,000 in figuring an education credit for 2021 only (if you meet all the other requirements). You cannot use any amount you paid in 2020 or 2022 to figure the qualified education expenses you use to figure your 2021 education credit(s). Adjusted Qualified Education Expenses For each student, reduce the qualified education expenses paid in 2021 by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student. CAUTION ! CAUTION ! Tax-free educational assistance. For tax-free educational assistance received in 2021, reduce the qualified education expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. See Academic period, earlier. Tax-free educational assistance includes: 1. The tax-free part of any scholarship or fellowship grant (including Pell grants); 2. The tax-free part of any employer-provided educational assistance; 3. Veterans' educational assistance; and 4. Any other educational assistance that is excludable from gross income (tax free), other than as a gift, bequest, devise, or inheritance. You may be able to increase the combined value of an education credit if the student includes some or all of a scholarship or fellowship grant in income in the year it is received. Generally, any scholarship or fellowship grant is treated as tax-free educational assistance. However, a scholarship or fellowship grant isn't treated as tax-free educational assistance to the extent the student includes it in gross income (the student may or may not be required to file a tax return) for the year the scholarship or fellowship grant is received and either: • The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses, or • The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses. A student cannot choose to include in income a scholarship or fellowship grant provided by an Indian tribal government that is excluded from income under the Tribal General Welfare Exclusion Act of 2014 or benefits provided by an educational program described in section 5.02(2) (b)(ii) of Rev. Proc. 2014-35, available at IRS.gov/irb/ 2014-26_IRB#RP-2014-35. Coordination with Pell grants and other scholarships or fellowship grants. 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 scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Also, 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). The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses (such as tuition and related fees) doesn't prevent the student from choosing to apply certain scholarships or fellowship grants to other expenses (such as room and board). By choosing to do so, the student will include the part applied to other expenses (such as room and board) in gross income and may be required to file a tax return. However, this allows payments made in cash, by check, by credit or debit card, or with borrowed funds, such as a student loan, to be applied to qualified education expenses. These payments, unlike certain scholarships or fellowship grants, won't reduce the qualified education expenses available to figure an education credit. The result is generally a larger education credit that reduces your total tax or increases your tax refund. TIP CAUTION ! -4- Instructions for Form 8863 (2021)