Qualified education expenses are amounts paid for tuition, fees, and certain related costs required for enrollment or attendance at an eligible educational institution. Eligible schools generally include accredited colleges, universities, vocational schools, and other post-secondary institutions that participate in federal student aid programs.
These expenses may qualify you for valuable education tax benefits, such as the American Opportunity Credit (AOC) or the Lifetime Learning Credit (LLC).
What Expenses Qualify for the American Opportunity Credit?
If you're eligible for the American Opportunity Credit, you may be able to claim:
- Tuition and required enrollment fees.
- Student activity fees that are required as a condition of enrollment or attendance.
- Books, supplies, and equipment required for a course of study, even if they weren't purchased directly from the school.
The amount reported in Box 1 of Form 1098-T is often the starting point for calculating qualified expenses, but you should also include eligible books, supplies, and equipment paid separately.
For example, if Form 1098-T shows $4,000 in tuition payments and you spent an additional $500 on required textbooks, your qualified expenses may total $4,500 before considering scholarships or grants.
What Expenses Qualify for the Lifetime Learning Credit?
If you're eligible for the Lifetime Learning Credit, you may be able to claim:
- Tuition and required enrollment fees.
- Books, supplies, and equipment only if they must be purchased directly from the institution as a condition of enrollment or attendance.
This is an important difference from the American Opportunity Credit, which generally allows required course materials to qualify even when purchased from another source.
What Expenses Do Not Qualify?
The following expenses are not considered qualified education expenses, even if the school requires you to pay them:
- Room and board
- Insurance premiums
- Medical expenses
- Transportation costs
- Personal living expenses
- Family living expenses
- Sports, games, or hobby courses that aren't part of a degree program
- Noncredit courses, unless they're part of an eligible degree or certificate program
Because these expenses don't qualify, they can't be used to calculate education credits.
How Do I Calculate My Qualified Education Expenses?
Most taxpayers begin with Form 1098-T, Tuition Statement, received from their school.
Review the following boxes carefully:
- Box 1 reports payments received for qualified tuition and related expenses.
- Box 5 reports scholarships and grants received during the year.
The IRS generally requires you to reduce your qualified education expenses by the amount of tax-free scholarships and grants you received.
If your Form 1098-T shows $4,000 in Box 1 and no amount in Box 5, your qualified expenses would generally be $4,000 plus any additional eligible books, supplies, or equipment you paid for separately.
If your Form 1098-T shows $4,000 in Box 1, $1,500 in Box 5, and $500 of eligible books, your qualified expenses would generally be calculated as follows:
- $4,000 tuition
- Minus $1,500 scholarships
- Plus $500 books and supplies
- Total qualified expenses: $3,000
What If My Scholarships Exceed My Tuition?
If the amount in Box 5 is greater than the amount in Box 1, you may not have enough net qualified expenses to claim an education credit.
For example, if Box 1 shows $2,000 of tuition and Box 5 shows $5,000 of scholarships, you generally won't qualify for an education credit based on those expenses.
In addition, you may need to determine whether any portion of the scholarship is taxable:
- Scholarship funds used for qualified education expenses are generally tax-free.
- Scholarship funds used for nonqualified expenses, such as housing, meal plans, or personal expenses, may be taxable and must be reported as income.
How Do I Enter Education Expenses in the Program?
To enter education expenses and determine your eligibility for education credits:
- Go to Federal.
- Select Deductions.
- Choose My Forms.
- Select Credits.
- Choose Education Credits.
The program will calculate the available education benefits and generally apply the option that provides the greatest tax benefit based on your entries.
How Do I Report Taxable Scholarships and Grants?
If part of a scholarship or grant was used for nonqualified expenses, the taxable portion should be reported as income.
To enter taxable scholarship income:
- Go to Federal.
- Select Income.
- Choose My Forms.
- Select Less Common Income.
- Choose Other Compensation.
- Select Scholarships and Grants (Not Reported on W-2).
The program will include the taxable amount in your income calculation.
2026 Tax Year Guidance
For tax year 2026 returns filed in 2027, education credits continue to be based on qualified education expenses paid during the year and reduced by tax-free scholarships, grants, employer-provided educational assistance, and other tax-free educational benefits.
Before claiming an education credit:
- Verify the information reported on Form 1098-T.
- Keep receipts for textbooks, supplies, and required equipment.
- Retain records showing how scholarships and grants were used.
- Review whether you're eligible for the American Opportunity Credit, Lifetime Learning Credit, or neither.
Good recordkeeping can help maximize your education tax benefits and make it easier to respond to any IRS questions.
Key Takeaway
Qualified education expenses generally include tuition, required fees, and certain course materials. The expenses that qualify depend on whether you're claiming the American Opportunity Credit or the Lifetime Learning Credit. Always reduce your expenses by tax-free scholarships and grants before calculating a credit, and enter your Form 1098-T information carefully to ensure you receive the education benefit you're entitled to claim.