Counting some grant money as income can open up to $2,500 of American Opportunity credit. See if it is worth testing with your numbers.
This is an estimate, not tax advice. Your answers stay on this page and are gone when you leave it.
How the choice works
A student may choose to count a grant as income when the grant's terms allow it to pay for things other than tuition. The IRS says a Pell grant can.
The counted part is treated as paying living costs. Cash or loan money that paid tuition then counts toward the credit. It does not matter that the school applied the grant to the tuition bill.
The counted amount cannot be more than the living costs actually paid in the tax year. The school's budget figure for living costs is not the limit.
A grant whose terms require it to go to tuition cannot be moved. If you do not know the terms, this tool treats the grant as tuition-only until your aid office confirms them.
The credit can rise only when expenses that count, minus all grants, come to less than $4,000.
The added tax and any credits lost can be more than the credit gained, so compare both ways.
The IRS worked example, tax year 2025
A 28-year-old unmarried student has $5,600 of qualified education expenses, $4,400 of room and board, and a $5,600 scholarship that may pay for any education cost, including room and board. Income before the scholarship is $39,250. These are 2025 tax figures.
Keep it all tax free
Count $4,000 as income
Income counted
$39,250
$43,250
Tax before credits
$2,585
$3,065
Expenses that count for the credit
$0
$4,000
American Opportunity credit
$0
$2,500
Tax after the credit
$2,585
$565
Result: $2,020 less tax ($2,585 minus $565). That difference is our subtraction. The IRS prints the two tax amounts.
IRS Publication 970 (2025), chapter 2, Examples 2 and 3.
Your numbers
Use whole dollars paid in calendar year 2026, for terms starting in 2026 or in the first 3 months of 2027. Do not use school-year totals.
If a parent claims you as a dependent, only that parent can take the credit for you. If a parent could claim you but does not, only you can take it.
Count what your courses need, even if you did not buy it from the school.
Only if the award terms allow it.
Also enter here any tribal government benefit covered by the Tribal General Welfare Exclusion Act or Rev. Proc. 2014-35. The IRS does not allow those to be counted as income.
What was actually paid in 2026, not the school's estimate.
For most filers this is the adjusted gross income on the federal return. On a joint return, it covers both parents.
Your estimate
Tax year 2026 (return filed in 2027)
Estimate, not tax advice.
Enter your amounts and the estimate appears here.
Before you decide
The counted amount is income. Tax can be owed on it, and that is what this tool subtracts from the credit.
The amount goes on the student's return even when a parent takes the credit. The IRS treats it as earned income when deciding if the student must file, so the student may need to file a return.
The 2028-29 FAFSA uses 2026 income. When it asks for grants reported as income, enter this amount, or income will look higher than it was.
State aid, school aid and other income-based benefits may treat this income differently. Ask your aid office and any benefit office before filing.
This estimate leaves out Arizona income tax and other credits, such as the child tax credit.
What to bring to a free tax helper
IRS-sponsored VITA sites prepare returns for free. There is no single income limit, and services vary by site, so ask first if the site handles education credits. Find a site or call 800-906-9887.
Form 1098-T from the school. If it has not arrived, ask the school after February 1, 2027.
Proof of what was paid and when. The 1098-T may not match it.
The school's employer identification number. It is on the 1098-T, or the school can give it to you.
Award letters and grant terms showing what each grant may pay for.
Receipts for books, supplies and course materials.
Records of rent, food and other living costs paid in 2026.
Photo ID, Social Security cards and birth dates for everyone on the return.
W-2s, 1099s and last year's tax returns.
Bank routing and account numbers for a direct deposit.
For a joint return filed electronically, both spouses need to be there.
Ask the helper to run the return both ways, with and without the amount, before you file.
Credit rules used here
Up to $2,500 per student: all of the first $2,000 of expenses, plus 25% of the next $2,000.
40% of the credit may be refundable, up to $1,000.
The credit shrinks between $80,000 and $90,000 of modified adjusted gross income ($160,000 to $180,000 married filing jointly).
Only for a student who had not finished the first 4 years of college before 2026, and only for 4 tax years per student.
The student must be in a degree or credential program at least half time for at least one academic period starting in 2026, or in the first 3 months of 2027 if paid in 2026.
No felony conviction for possessing or distributing a controlled substance as of the end of 2026.
You must enter the school employer identification number on Form 8863.
New for tax year 2026: Social Security numbers
The person taking the credit needs a Social Security number valid for employment, issued by Social Security before the return due date, including extensions.
A student who is a dependent needs one too.
On a joint return, one spouse with a valid number is enough, even if the other spouse is the student.
An ITIN no longer qualifies, and neither does a number issued only for a federally funded benefit. If your card says not valid for employment and your status has changed, contact Social Security.
Proposed, not final
On August 19, 2026 the IRS and Treasury proposed treating the refunded part of this credit as a federal public benefit limited to citizens, nationals and qualified aliens. The part that only reduces tax would not change. It would apply to tax years ending on or after a final rule is published. As of November 1, 2026 we found no final rule.
Sources
Figures checked November 1, 2026. The 2026 Form 8863 instructions are an IRS draft dated September 11, 2026 and may change.
The $2,700 Form 8615 figure for 2026 is figured from the 2026 inflation adjustments, not read from a 2026 form. Tax is figured the way the IRS Tax Table figures it.