Taxpayers who pay qualified higher education expenses with tax-free funds cannot claim a credit for those amounts. Qualified expenses must be reduced by the amount of any tax-free educational assistance taxpayers receive. Ask the taxpayer if the student received any of these tax-free educational benefits:
- Pell grants.
- Employer-provided educational assistance.
- Veteran's educational assistance.
- Tax-free portions of scholarships and fellowships.
- Any other nontaxable payments received as educational assistance (other than gifts or inheritances). For example, distributions from a 529 plan reported on Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530).
- Refunds of the year's qualified expenses paid on behalf of a student (e.g., if the student dropped a class and received a refund of tuition).