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materials. Bill’s adjusted qualified education expenses would be zero and there would be no education credit. Therefore, Bill's tax liability after credits would be $2,618. Example 3—Scholarship partially included in in- come. The facts are the same as in Example 2—Scholar- ship excluded from income. If, unlike Example 2, Bill in- cludes $4,000 of the scholarship in income, the $4,000 will be deemed to have been applied to pay for room and board. The remaining $1,600 of the $5,600 scholarship would reduce the qualified education expenses, and the adjusted qualified education expenses would be $4,000. Bill's AGI and MAGI would increase to $40,450, the taxa- ble income would increase to $27,500, and the tax liability before credits would increase to $3,098. Based on the ad- justed qualified education expenses of $4,000, Bill would be able to claim an American opportunity credit of $2,500 and the tax liability after credits would be $598 ($3,098 − $2,500). Example 4—Scholarship applied by the postse- condary school to tuition. The facts are the same as in Example 3—Scholarship partially included in income, ex- cept the $5,600 scholarship is paid directly to the local college. The fact that the local college applies the scholar- ship to Bill's tuition and related fees doesn't prevent Bill from including $4,000 of the scholarship in income. As in Example 3, by doing so, Bill will be deemed to have ap- plied $4,000 to pay for room and board. Bill would be able to claim the American opportunity credit of $2,500 and the tax liability after credits would be $598. Example 5—Student with a dependent child. Jane, age 28 and unmarried, enrolled full-time as a first-year student at a local technical college to get a certificate as a computer technician. This was Jane’s first year of postse- condary education. During 2022, Jane paid $6,000 for qualified education expenses. Jane and the college meet all the requirements for the American opportunity credit. Jane has a dependent child, age 10, who is a qualifying child for purposes of receiving the earned income credit (EIC) and the child tax credit. Jane's wages are $20,000. Jane withheld no income taxes on these wages and has no other income or adjustments. Jane was awarded a $5,500 scholarship. Under the terms of the scholarship, it may be used to pay tuition and any living expense, includ- ing rent. Jane paid $10,000 in living expenses in 2022. If Jane excludes the entire scholarship from income, Jane will be deemed to have applied the entire scholar- ship to pay qualified education expenses. The AGI and MAGI would be $20,000. The tax liability before any cred- its would be $61. The qualified education expenses would be reduced to $500. Jane would be able to receive a $261 American opportunity credit ($200 refundable and $61 nonrefundable), a $1,500 additional child tax credit, and a $3,733 EIC. In total, Jane would be able to receive a tax refund of $5,433. If Jane includes the entire scholarship in income, Jane will be deemed to have applied the entire scholarship to pay living expenses. The qualified education expenses would be $6,000, and the AGI and MAGI would be $25,500. The tax liability before any credits would be $613. Jane would be able to receive a $1,613 American opportunity credit ($1,000 refundable and $613 nonre- fundable), a $1,500 additional child tax credit, and a $2,871 EIC. In total, Jane would be able to receive a tax refund of $5,371. If Jane includes $3,500 of the scholarship in income, Jane will be deemed to have applied $3,500 of the schol- arship to pay living expenses, and $2,000 to pay qualified education expenses. The qualified education expenses would be $4,000, and the AGI and MAGI would be $23,500. The tax liability before any credits would be $413. Jane would be able to receive a $1,413 American opportunity credit ($1,000 refundable and $413 nonre- fundable), a $1,500 additional child tax credit, and a $3,191 EIC. In total, Jane would be able to receive a tax refund of $5,691. If Jane includes $1,500 of the scholarship in income, Jane will be deemed to have applied $1,500 of the schol- arship to pay living expenses, and $4,000 to pay qualified education expenses. The qualified education expenses would be $2,000, and the AGI and MAGI would be $21,500. The tax liability before any credits would be $211. Jane would be able to receive a $1,011 American opportunity credit ($800 refundable and $211 nonrefunda- ble), a $1,500 additional child tax credit, and a $3,510 EIC. In total, Jane would be able to receive a tax refund of $5,810. This is the highest tax refund among these sce- narios. Note. Whether you will benefit from applying a schol- arship or fellowship grant to nonqualified expenses will depend on the amount of the student's qualified education expenses, the amount of the scholarship or fellowship grant, and whether the scholarship or fellowship grant may (by its terms) be used for nonqualified expenses. Any benefit will also depend on the student’s federal and state marginal tax rates as well as any federal and state tax credits the student claims. Before deciding, look at the to- tal amount of your federal and state tax refunds or taxes owed and, if the student is your dependent, the student’s tax refunds or taxes owed. For example, if you are the stu- dent and you also claim the EIC, choosing to apply a scholarship or fellowship grant to nonqualified expenses by including the amount in your income may benefit you if the increase to your American opportunity credit is more than the decrease to your EIC. Expenses That Don't Qualify Qualified education expenses don't include amounts paid for: • Insurance; • Medical expenses (including student health fees); • Room and board; • Transportation; or • Similar personal, living, or family expenses. This is true even if the amount must be paid to the institu- tion as a condition of enrollment or attendance. Chapter 2 American Opportunity Credit Page 17