Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Do not include these payments as income on your federal tax return.
Although you are not required to enter these payments for education as income, you are also not allowed to claim these payments for any education credit or deduction.
If you have received a 1098-T from your educational institution you would typically have an amount reported in Box 1 for amounts paid for tuition. If you received the GI Bill you would also have an amount listed in Box 5 under scholarships or grants. If the amount in Box 5 is larger than Box 1, you cannot claim a credit for education such as the American Opportunity Credit or Lifetime Learning Credit. If the amount in Box 5 is less than Box 1, you must reduce Box 1 by the amount in Box 5 and this will be the amount for qualified expenses.
Example using two benefits:
You have returned to college and are receiving two education benefits under the latest GI Bill:
- a $1,612 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and
- $4,000 paid directly to your college for tuition.
Neither of these benefits is taxable and you do not report them on your tax return. You also want to claim an American Opportunity Credit on your return. You paid $5,000 in qualified education expenses. To figure the amount of credit, you must first subtract the $4,000 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. You do not subtract any amount of the BHA because it was paid to you and its use was not restricted.
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