Qualified educational expenses for tax credits must be reduced by which of the following?

Qualified educational expenses that can be used to claim tax credits, such as the American Opportunity Credit or the Lifetime Learning Credit, must be reduced by any nontaxable scholarships and grants received by the student. This is because tax credits are intended to provide financial relief for out-of-pocket costs incurred by students and their families. When a student receives scholarships or grants that do not need to be repaid, these amounts effectively reduce the amount of eligible expenses that can be claimed for tax benefits. Therefore, subtracting nontaxable scholarships and grants ensures that the tax credits are only applied to the actual costs that the taxpayer has incurred.

This principle is established to prevent double-dipping, where taxpayers might claim credits based on expenses that have already been covered by financial aid. In contrast, other options do not require a reduction of qualified expenses in this manner, as loans and tax credit claims do not directly impact the basis for calculating eligible expenses.