! scholarship or fellowship grant provided by an In

CAUTION dian tribal government that is excluded from in-

come under the Tribal General Welfare Exclusion Act of 2014 or benefits provided by an educational program de- scribed in Revenue Procedure 2014-35, section 5.02(2)(b) (ii), available at IRS.gov/irb/2014-26_IRB#RP-2014-35.

You may be able to increase the combined value

TIP 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. For examples, see Coor- dination with Pell grants and other scholarships , later.

Refunds. A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2025 may be treated as a refund. See Tax-free educational assistance , earlier.

Refunds received in 2025. For each student, figure the adjusted qualified education expenses for 2025 by adding all the qualified education expenses for 2025 and subtracting any refunds of those expenses received from the eligible educational institution during 2025.

24 Chapter 3 Lifetime Learning Credit Publication 970 (2025)

Figure 3-1. Can You Claim the Lifetime Learning Credit for 2025?

*Qualified education expenses paid by a dependent you claim on your tax return, or by a third party for that dependent, are considered paid by you.

**Your education credits may be limited to your tax liability minus certain credits. See Form 8863 for more details.

Publication 970 (2025) Chapter 3 Lifetime Learning Credit 25

Refunds received after 2025 but before your in- come tax return is filed. If anyone receives a refund after 2025 of qualified education expenses paid on behalf of a student in 2025 and the refund is paid before you file an income tax return for 2025, the amount of qualified education expenses for 2025 is reduced by the amount of the refund.

Refunds received after 2025 and after your income tax return is filed. If anyone receives a refund after 2025 of qualified education expenses paid on behalf of a student in 2025 and the refund is paid after you file an income tax return for 2025, 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 2025 or any refund of your qualified education expenses paid in 2025 is received after you file your 2025 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2025 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2025 and figure the amount by which your 2025 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 December 2025, and your child began college in January 2026. You filed your 2025 tax return on February 14, 2026, 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 2025 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. The refigured credit is $1,280 and your tax liability increased by $580. See the instructions for your 2026 income tax return to determine where to include this tax.

If you pay qualified education expenses in both

TIP 2025 and 2026 for an academic period that be-

gins in the first 3 months of 2026 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2026 instead of reducing your expenses for 2025.

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

• 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 education 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 Ex- penses in chapter 2.

Coordination with Pell grants and other scholarships. You may be able to increase your lifetime learning credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student’s gross income. Your credit may increase only if the amount of the student’s qualified education expenses minus the total amount of scholarships and fellowship grants is less than $10,000. If this situation applies, 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 instead of qualified education expenses. Nonqualified expenses 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 includes in income don’t reduce the student’s qualified education expenses available to figure your lifetime learning credit. Thus, including enough of the scholarship or fellowship 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 considering any increased tax liability from the additional income. 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 discussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expenses can’t exceed the amount of the student’s actual nonqualified expenses that are paid in the tax year. This amount may differ from the student’s living expenses estimated 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 expenses, such as tuition and related fees, doesn’t prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified expenses. By making this choice (that is, by including the

26 Chapter 3 Lifetime Learning Credit Publication 970 (2025)

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 unmarried, 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 $30,600. Judy claims the standard deduction of $15,750, resulting in taxable income of $14,850 and a tax liability before credits of $1,547. Judy claims no credits other than the lifetime learning credit. In July 2025, Judy paid $700 for the summer 2025 semester; in August 2025, Judy paid $1,900 for the fall 2025 semester; and in December 2025, Judy paid another $1,900 for the spring semester beginning in January 2026. Judy and the college meet all requirements for the lifetime learning credit. All of the $4,500 tuition paid in 2025 can be used when figuring the 2025 lifetime learning credit. Judy claims a $900 lifetime learning credit and the tax liability after credits is $647.

Example 2—scholarship excluded from income. The facts are the same as in Example 1, except that Judy was awarded a $1,500 scholarship. Under the terms of the scholarship, it may be used to pay any education 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 tuition paid in 2025 could be used when figuring the 2025 lifetime learning credit. The lifetime learning credit would be reduced to $600 and the tax liability after credits would be $947.

Example 3—scholarship included in income. The facts are the same as in Example 2 . 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 $32,100, the taxable income would be $16,350, and the tax liability before credits would be $1,727. Judy would be able to use the $4,500 of adjusted qualified education expenses to figure the credit. Judy could claim a $900 lifetime learning credit and the tax liability after credits would be $827.

Example 4—scholarship applied by the postse- condary school to tuition. The facts are the same as in Example 3, except the $1,500 scholarship is paid directly to the public community college. The fact that the public community college applies the scholarship to Judy’s tuition and related fees doesn’t prevent Judy from including the $1,500 scholarship 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 learning credit and the tax liability after credits would be $827.

Note: Whether you will benefit from applying a scholarship 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 total 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 student and you also claim the earned income credit, choosing to apply a scholarship or fellowship grant to nonqualified 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 income.

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 institution as a condition of enrollment or attendance.

Sports, games, hobbies, and noncredit courses. Qualified education expenses generally don’t include expenses that relate to any course of instruction or other education 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 educational 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.