Education

Good points were made in this thread, but another thing to keep in mind is that it’s possible to choose to allocate more of your scholarship money to room & board, increasing your tax, so that you have more qualifying tuition to use for an education credit which is actually larger than that additional tax (sometimes much larger).

For example (to use rainydaze’s scenario), if you have $10,000 of scholarship funds and $7,000 of tuition, you can say you used $7,000 of the scholarship on room & board (instead of just $3,000). That leaves $3,000 to offset tuition, which means you have the remaining $4,000 of tuition to use toward a maximum “American Opportunity Credit” (which is a dollar-for-dollar “refund” of the first $2,000 of qualifying education expenses, and 25% of the second $2,000).

Here is the IRS telling us about this treatment, and here’s a TurboTax support discussion with some of the logistics in the program. Note that it is more applicable to undergraduates (as the American Opportunity Credit is the best one, and only available to them), and also that the scholarship must not be specifically earmarked for actual tuition payments (see RaifH’s post in that last thread).

The underlying concept here is that any dollar of “qualifying expenses” (i.e. tuition and fees, but not room & board) can be used for only one tax benefit: to either make a dollar of scholarship non-taxable or to get a credit (but never both—that’s called “double-dipping”). So you want the one that results in the best overall result on your tax return.

@Uni1074