Does the education expenses include financial aid paying for books and supplies?

[ColeenD3]

You do not get to take a credit on any expenses paid by financial aid, as you did not pay for them.

Federal Pell Grants are need-based nontaxable scholarships for tax purposes. They should not be reported as income for tax purposes, as long as it was used to pay for qualified education expenses. Because they are nontaxable and not considered income, you cannot claim a tax credit or deduction for any portion of the education expenses that were covered by the grant. However, receiving a Pell Grant does not mean you cannot also get a tax credit or deduction. If your eligible expenses and fees were more than the grant, then you may be able to claim the difference on your taxes.

[Carl]

There are basically (very basically) two types of education expenses.

1) Qualified education expenses.

2) Unqualified but allowed education expenses.

Qualified education expenses is tuition, books, and lab fees. That's it. Period. But do understand that "lab fees" is a rather broad category.

Unqualified but allowed education expenses would be room and board "if" they were paid with money from a 529 fund, provided that room and board was "in direct support" of the education. For example, if you attended college for the spring semester from Jan-May 2020 and for the fall semester from Sep-Dec 2020, 529 funds used to pay for room and board for those 9 months is not taxable income. However, if you did not enroll in classes for the summer semester from Jun-Aug 2020, then money used from a 529 fund for pay for room and board was not in direct support of the education, and is therefore taxable income to the beneficiary recipient whose SSN is on the 1099-Q.

[Hal_Al]

Q. Does the education expenses include financial aid paying for books and supplies?

A. Books and required "course materials", including computers, are qualified expenses for tax free scholarship. 

It's not clear why you are asking.  Are you trying to avoid declaring some of your scholarship as taxable income? Or are you trying to claim an education credit, even though some of the expenses were paid by scholarship?

There's a way to do either.  To avoid tax on the scholarship, just enter the book expenses, in TT.

To claim the education credit, see "loop hole" below. 

There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income.