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Example 1. Last year, your child graduated from high school and enrolled in college for the fall semester. You and your child meet all other requirements to claim the American opportunity credit, and you need to determine adjusted qualified education expenses to figure the credit. Your child has $5,000 of qualified education expenses and $4,000 of room and board. Your child received a $5,000 Pell grant and took out a $2,750 student loan to pay these expenses. You paid the remaining $1,250. The Pell grant by its terms may be used for any of these expenses. If you and your child choose to apply the Pell grant to the qualified education expenses, it will qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Your child won't include any part of the Pell grant in gross income. After reducing qualified education expenses by the tax-free scholarship, you will have $0 ($5,000 − $5,000) of adjusted qualified education expenses available to figure your credit. Your credit will be $0. Example 2. The facts are the same as in Example 1. If, unlike in Example 1, you and your child choose to apply only $1,000 of the Pell grant to the qualified education expenses and to apply the remaining $4,000 to room and board, only $1,000 will qualify as a tax-free scholarship. Your child will include the $4,000 applied to room and board in gross income, and it will be treated as earned income for purposes of determining whether your child is required to file a tax return. If the $4,000 is your child’s only income, your child won't be required to file a tax return. After reducing qualified education expenses by the tax-free scholarship, you will have $4,000 ($5,000 − $1,000) of adjusted qualified education expenses available to figure your credit. Your refundable American opportunity credit will be $1,000. Your nonrefundable credit may be as much as $1,500, but depends on your tax liability. If you're not otherwise required to file a tax return, you should file to get a refund of your $1,000 refundable credit, but your tax liability and nonrefundable credit will be $0. Note. The result may be different if your child has other income or if you're the student. If you're the student and you claim the earned income credit, choosing not to apply a Pell grant to qualified education expenses may decrease your earned income credit at certain income levels by increasing your adjusted gross income. For details and more examples, see Pub. 970. Unlike a scholarship or fellowship grant, a tax-free distribution from a Coverdell ESA or qualified tuition program (section 529 plan) can be applied to either qualified education expenses or certain other expenses (such as room and board) without creating a tax liability for the student. An education credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA or qualified tuition program, as long as the same expenses aren't used for both benefits. For details, see Pub. 970, chapters 7 and 8. Tax-free educational assistance treated as a refund. Some tax-free educational assistance received after 2021 may be treated as a refund of qualified education expenses paid in 2021. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2021 for qualified education expenses paid on behalf of a student in 2021 (or attributable to enrollment at an eligible educational institution during 2021). If this tax-free educational assistance is received after 2021, but before you file your 2021 income tax return, see Refunds received after 2021, but before your income tax return is filed, later. If this tax-free educational assistance is received after 2021 and after you file your 2021 income tax return, see Refunds TIP received after 2021 and after your income tax return is filed, later. Refunds. A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. Some tax-free educational assistance received after 2021 may be treated as a refund. See Tax-free educational assistance, earlier. Refunds received in 2021. For each student, figure the adjusted qualified education expenses for 2021 by adding all the qualified education expenses paid in 2021 and subtracting any refunds of those expenses received from the eligible educational institution during 2021. Refunds received after 2021, but before your income tax return is filed. If anyone receives a refund after 2021 of qualified education expenses paid on behalf of a student in 2021 and the refund is received before you file your 2021 income tax return, reduce the amount of qualified education expenses for 2021 by the amount of the refund. Refunds received after 2021 and after your income tax return is filed. If anyone receives a refund after 2021 of qualified education expenses paid on behalf of a student in 2021 and the refund is received after you file your 2021 income tax return, you may need to repay some or all of the credit that you claimed. See Credit recapture next. Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2021, or any refund of your qualified education expenses paid in 2021, is received after you file your 2021 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2021 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2021 and figure the amount by which your 2021 tax liability would have increased if you had claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received. Example. You paid $8,000 tuition and fees in December 2021 for your child's spring semester beginning in January 2022. You filed your 2021 tax return on February 2, 2022, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x 20% (0.20)). You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $1,400. You must refigure your 2021 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). The refigured credit is $1,320 and your tax liability increased by $280. You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2022 income tax return. See the instructions for your 2022 income tax return to determine where to include this tax. If you paid qualified education expenses in both 2021 and 2022 for an academic period that begins in the first 3 months of 2022 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce the qualified education expenses you paid in 2022 instead of reducing the qualified education expenses you paid in 2021. Eligible Educational Institution An eligible educational institution is generally any accredited public, nonprofit, or proprietary (private) college, university, vocational school, or other postsecondary institution. Also, the institution must be eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited postsecondary institutions meet this definition. TIP Instructions for Form 8863 (2021) -5-