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fellowship grants to the student's actual nonqualified ex- penses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student's nonqualified expenses in income), the student may increase taxable income and may be required to file a tax return. But 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. Example 1—No scholarship. Judy, who is unmar- ried, is taking courses at a public community college to be recertified to teach in public schools. The adjusted gross income (AGI) and the MAGI, for purposes of the credit, are $27,800. Judy claims the standard deduction of $12,950, resulting in taxable income of $14,850 and a tax liability before credits of $1,580. Judy claims no credits other than the lifetime learning credit. In July 2022, Judy paid $700 for the summer 2022 semester; in August 2022, Judy paid $1,900 for the fall 2022 semester; and in De- cember 2022, Judy paid another $1,900 for the spring se- mester beginning in January 2023. Judy and the college meet all requirements for the lifetime learning credit. All of the $4,500 tuition paid in 2022 can be used when figuring the 2022 lifetime learning credit. Judy claims a $900 life- time learning credit and the tax liability after credits is $680. Example 2—Scholarship excluded from income. The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Un- der the terms of the scholarship, it may be used to pay any educational expenses, including room and board. If the scholarship is excluded from income, Judy will be deemed (for purposes of figuring the education credit) to have applied the scholarship to pay for tuition, required fees, and course materials. Only $3,000 of the $4,500 tui- tion paid in 2022 could be used when figuring the 2022 lifetime learning credit. The lifetime learning credit would be reduced to $600 and the tax liability after credits would be $980. Example 3—Scholarship included in income. The facts are the same as in Example 2—Scholarship exclu- ded from income. If, unlike Example 2, Judy includes the $1,500 scholarship in income, Judy will be deemed to have applied the entire scholarship to pay for room and board. Judy's AGI and MAGI would increase to $29,300, the taxable income would be $16,350, and the tax liability before credits would be $1,760. Judy would be able to use the $4,500 of adjusted qualified education expenses to figure the credit. Judy could claim a $900 lifetime learn- ing credit and the tax liability after credits would be $860. Example 4—Scholarship applied by the postse- condary school to tuition. The facts are the same as in Example 3—Scholarship included in income, except the $1,500 scholarship is paid directly to the public commun- ity college. The fact that the public community college ap- plies the scholarship to Judy's tuition and related fees doesn't prevent Judy from including the $1,500 scholar- ship in income. As in Example 3, by doing so, Judy will be deemed to have applied the entire scholarship to pay for room and board. Judy could claim the $900 lifetime learn- ing credit and the tax liability after credits would be $860. 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 earned income credit, choos- ing to apply a scholarship or fellowship grant to nonquali- fied expenses by including the amount in your income may not benefit you if the decrease to your earned income credit as a result of including the scholarship or fellowship grant in income is more than the increase to your lifetime learning credit as a result of including this amount in in- come. 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. Sports, games, hobbies, and noncredit courses. Qualified education expenses generally don't include ex- penses that relate to any course of instruction or other ed- ucation that involves sports, games, or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Comprehensive or bundled fees. Some eligible educa- tional institutions combine all of their fees for an academic period into one amount. If you don't receive or don't have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is generally required to make this allocation and provide you with the amount you paid for qualified education expenses on Form 1098-T. See Figuring the Credit, later, for more information about Form 1098-T. Page 28 Chapter 3 Lifetime Learning Credit