Qualified scholarships and fellowships are treated as tax-free amounts if all of the following conditions are met:

1. You are a candidate for a degree at an educational institution,
2. Amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies, and equipment required for courses of instruction, and
3. The amounts received are not a payment for your services.

For additional information on Scholarship and Fellowship Grants, refer to Tax Topic 421, and Publication 970, Tax Benefits for Education.

References:

• Publication 970, Tax Benefits for Education
• Tax Topic 421, Scholarship and fellowship grants

You can not claim a credit for the amount of higher education expenses paid for with a tax-free scholarships.

For more information, refer to Form 8863 (PDF), Education Credits (Hope and Lifetime Learning Credits). Publication 970, Tax Benefits for Education, and Tax Topic 605, Education Credits, or Tax Topic 421, Scholarship and Fellowship Grants.

Yes, fill out Form 8863 (PDF), Education Credits (Hope and Lifetime Learning Credits).

You must reduce the total qualified expenses by the amount of any tax-free educational assistance. Do not reduce the qualified expenses by amounts paid with the student's earnings, loans, gifts, inheritances, and personal savings. Also, do not reduce the qualified expenses by any scholarship reported as income on the student's return or any scholarship which, by its terms, can not be applied to qualified tuition and related expenses.

For more information, refer to Publication 970, Tax Benefits for Education or Tax Topic 605, Education Credits.

References:

• Publication 970, Tax Benefits for Education
• Tax Topic 605, Education Credits
• Tax Topic 513, Educational Expenses
• Form 8863 (PDF), Education Credits (Hope and Lifetime Learning Credits)