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adding all the qualified education expenses for 2022 and subtracting any refunds of those expenses received from the eligible educational institution during 2022. Refunds received after 2022 but before your in- come tax return is filed. If anyone receives a refund af- ter 2022 of qualified education expenses paid on behalf of a student in 2022 and the refund is paid before you file an income tax return for 2022, the amount of qualified educa- tion expenses for 2022 is reduced by the amount of the refund. Refunds received after 2022 and after your income tax return is filed. If anyone receives a refund after 2022 of qualified education expenses paid on behalf of a stu- dent in 2022 and the refund is paid after you file an in- come tax return for 2022, you may need to repay some or all of the credit. See Credit recapture next. Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2022 or any refund of your qualified education expenses paid in 2022 is received after you file your 2022 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2022 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2022 and figure the amount by which your 2022 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 pay $9,300 in tuition and fees in De- cember 2022, and your child began college in January 2023. You filed your 2022 tax return on February 14, 2023, and claimed a lifetime learning credit of $1,860. You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $2,900. You must refigure your 2022 lifetime learning credit using $6,400 of qualified education expen- ses instead of $9,300. The refigured credit is $1,280 and your tax liability increased by $580. See the instructions for your 2023 income tax return to determine where to in- clude this tax. If you pay qualified education expenses in both 2022 and 2023 for an academic period that be- gins in the first 3 months of 2023 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified educa- tion expenses for 2023 instead of reducing your expenses for 2022. Amounts that don't reduce qualified education ex- penses. Don't reduce qualified education expenses by amounts paid with funds the student receives as: • Payment for services, such as wages; • A loan; • A gift; • An inheritance; or TIP • A withdrawal from the student's personal savings. Don't reduce the qualified education expenses by any scholarship or fellowship grant reported as income on the student's tax return in the following situations. • The use of the money is restricted, by the terms of the scholarship or fellowship grant, to costs of attendance (such as room and board) other than qualified educa- tion expenses, as defined in Qualified education ex- penses in chapter 1. • The use of the money isn't restricted. For examples, see Adjustments to Qualified Education Expenses in chapter 2. Coordination with Pell grants and other scholar- ships. You may be able to increase your lifetime learning credit when the student (you, your spouse, or your de- pendent) includes certain scholarships or fellowship grants in the student’s gross income. Your credit may in- crease only if the amount of the student's qualified educa- tion expenses minus the total amount of scholarships and fellowship grants is less than $10,000. If this situation ap- plies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses in- stead of qualified education expenses. Nonqualified ex- penses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees. Scholarships and fellowship grants that the student in- cludes in income don't reduce the student's qualified edu- cation expenses available to figure your lifetime learning credit. Thus, including enough of the scholarship or fellow- ship grant in the student's income to report up to $10,000 in qualified education expenses for your lifetime learning credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even con- sidering any increased tax liability from the additional in- come. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional lifetime learning credit and may cause your tax refund to decrease or the amount of tax you owe to increase. Your specific circumstances will determine what amount, if any, of the scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe. The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules dis- cussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for non- qualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expen- ses can't exceed the amount of the student's actual non- qualified expenses that are paid in the tax year. This amount may differ from the student's living expenses esti- mated by the student's school in figuring the official cost of attendance under student aid rules. The fact that the educational institution applies the scholarship or fellowship grant to qualified education ex- penses, such as tuition and related fees, doesn't prevent the student from choosing to apply certain scholarships or Chapter 3 Lifetime Learning Credit Page 27