Many students, by default, will calculate their Pell Grant funds as being used to pay for qualified education expenses, because their college applies the grant for tuition. It isn’t wrong, but that amount will decrease the expenses eligible to be used to claim an education credit like the American Opportunity Credit.

Instead, Pell Grants can now be allocated as living expense, up to the full amount of actual living expenses – even if a student’s college actually applied the Pell Grant to his tuition and fees. The amount will then count as taxable income, but it might be worth it to maximize the education credit. This complexity affects almost 9 million students. (Note: More resources on this are forthcoming from the IRS.)