By: Dr. Jamie Connors, CPA, and Stephan Davenport, Ph.D., CPA
By taking advantage of the Tennessee Dual Enrollment Grant, many Tennessee high school students are eligible to earn college credit at little or no cost while still in high school. Eligible high school students can apply for a Dual Enrollment Grant that provides free tuition for up to five courses at any public post-secondary institution.1 According to the Tennessee Higher Education Fact Book, more than 28,000 students had dual enrollment status in fall 2023.2 While this alone provides a tremendous benefit, additional benefits are also available to taxpayers when they file their taxes. In this article, we explore the opportunities that exist for students who take advantage of the Tennessee Dual Enrollment Grant to also claim the Lifetime Learning Credit.
Tax Treatment
Generally, scholarships and grants are excluded from gross income under Internal Revenue Code (IRC) §117. However, this exclusion is only available for “an individual who is a candidate for a degree” (IRC §117(a)). While this apparently requires any dual enrollment student to report the grant as income, IRC §117-3(e) broadly defines “candidate for a degree,” so whether a dual enrollment student is considered to be a degree candidate is subject to interpretation.
Because of the requirements of the education credits discussed in IRC §25A, taxpayers might prefer to include the Dual Enrollment Grant as income to the student. IRC §25A provides two credits for qualified education expenses – the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. The AOTC is generally the more favorable credit, but the eligibility requirements are stricter. Most dual enrollment students would not meet the criteria to claim the AOTC, so we focus on the Lifetime Learning Credit. See Table 1 for a comparison of the AOTC and the Lifetime Learning Credit.
The Lifetime Learning Credit is equal to 20% of qualified tuition and related expenses up to $10,000. However, qualified expenses must be reduced by scholarships excluded from gross income (IRC §25A(g)(2)). This is the first reason why it might be preferable for taxpayers to include the Dual Enrollment Grant in gross income. The second reason is that most high school students earn below the filing threshold or are in a low tax bracket. A student can earn up to the standard deduction amount ($14,600 in 2024) before they are required to file a return, so any scholarship or grant income is likely to have minimal, if any, tax consequences. If the student is eligible to be claimed as a dependent on the parents’ return, the parent receives the Lifetime Learning Credit.
While this treatment seems almost too good to be true, the IRS encourages taxpayers to maximize the benefit of the education credits in Publication 970, Tax Benefits for Education.3 It is important to keep in mind the income phaseout threshold of the Lifetime Learning Credit, as well as the limitation on qualified expenses (tuition and required fees paid to the educational institution).
The following examples illustrate the potential benefits for taxpayers with high school students who receive the Dual Enrollment Grant.
EXAMPLE 1. Assume a couple is married, filing a joint return with taxable income of $100,000 and has a dependent who is a junior in high school. The student enrolls in one dual enrollment class and receives a grant equal to the cost of tuition, $500. Required textbooks are $100 and paid directly to the institution as part of the required course fee, which is not covered by the grant. The student has a summer job and earns $5,000. If the student does not report the grant as taxable income, the parents can claim the Lifetime Learning Credit for the cost of the textbooks and receive a credit of $20 (20% of $100). The student has gross income of $5,000 but is not required to file a tax return because it is below the filing requirement.
EXAMPLE 2. Assume the same information as Example 1, except the student does report the grant as taxable income. The parents can claim $600 of qualified expenses for the Lifetime Learning Credit and receive a credit of $120. The student has gross income of $5,500, which is still below the filing requirement. The additional income does not create any additional tax liability for the student but increases the Lifetime Learning Credit by $100.
EXAMPLE 3. Assume the same information as Example 1, except the student has gross income of $15,000. If the student reports the grant as income, the student’s tax liability increases by $50 ($500 x 10%). However, this is still beneficial to the family overall because the Lifetime Learning Credit to the parents increases by $100.
Additional Planning Considerations
Additional planning is required to maximize the available credit if the student enrolls in dual enrollment and enrolls full-time in college during the same calendar year (i.e., a high school senior who graduates and enrolls immediately in college). Although the AOTC is more valuable, it is limited to four years. This means that if a student progresses through college in four years, the AOTC will not be available for the final spring semester. It might be advantageous to wait to claim the AOTC and claim the Lifetime Learning Credit for any dual enrollment classes taken the final semester of the student’s senior year of high school, as well as expenses during the fall semester of the student’s freshman year in college.
Another important consideration to remember is that the AOTC is based on each eligible student, but the Lifetime Learning Credit is based on all individuals covered by the tax return. For example, assume a couple files a joint return and has three dependents – one is a part-time student who has been a student for six years, one is a full-time student in year three, and one is a full-time student in the first semester of college who also enrolled in dual enrollment while in the last semester of high school. Dependent #1 is only eligible for the Lifetime Learning Credit because the AOTC is exhausted after four years. Dependents #2 and #3 are eligible for either the AOTC or the Lifetime Learning Credit. If each dependent has $5,000 of eligible education expenses and claims the Lifetime Learning Credit, the total credit is limited to $2,000 for the entire tax return ($10,000 max. x 20%). However, if only dependent #2 claims the AOTC, those expenses are not counted for the Lifetime Learning Credit, and the couple would receive $2,500 for the AOTC as well as $2,000 for the Lifetime Learning Credit. If dependent #2 and dependent #3 both claim the AOTC, the couple receives a $5,000 AOTC and a $1,000 Lifetime Learning Credit. However, if the total education expenses from the first semester exceed the maximum amount for the AOTC, any benefit from the dual enrollment classes would be lost if dependent #3 claims the AOTC rather than the Lifetime Learning Credit.
The Dual Enrollment Grant provides a great benefit for Tennessee high school students to earn college credit. With a little tax planning, it is possible to increase that benefit with the Lifetime Learning Credit and potentially receive a tax credit that is greater than the out-of-pocket costs incurred by the parents. By including the grant in the student’s gross income, even if it increases the student’s tax liability, the net benefit for families will be higher. While this might seem like a loophole, IRS publications seem to highlight the flexibility of reporting scholarships as income and to encourage taxpayers to take advantage of this flexibility to maximize the benefits offered.
About the Authors
Dr. Jamie Connors, CPA, is a professor of accounting and interim dean of the C. Lamar and Ann Wright School of Business. She has been teaching accounting at Dalton State College for 16 years after 16 years of public accounting in the Chattanooga area. She can be reached at jconnors@daltonstate.edu.
Stephan Davenport, Ph.D., CPA, is an associate professor of accounting at the University of Tennessee at Chattanooga. He can be reached at Steve-Davenport@utc.edu.
References
1Tennessee Code. Title 49 – Education (2023). Retrieved at https://bit.ly/tncode49, last accessed December 20, 2024.
2Tennessee Higher Education Commission Fact Book (2024). Retrieved at https://bit.ly/tnhigheredfactbook, last accessed December 20, 2024.
3Internal Revenue Service. Publication 970, Tax Benefits for Education (2023). Retrieved at https://bit.ly/irspub970, last accessed December 20, 2024.
This article was originally published in the September/October 2025 Tennessee CPA Journal.
