SEE - Special Enrollment Exam Quiz: Education Credits
15 questions · exam conditions
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Education CreditsQuestion 1 of 15

A 40-year-old single client earned her bachelor's degree in 2019. In 2025 she enrolled half-time in a graduate certificate program at an eligible university to update her skills. Her 2025 tuition was $7,000; she paid $4,500 herself, and her employer paid $2,500 directly to the university under an educational assistance plan that is excluded from her wages. Her MAGI is $70,000 and her tax liability before credits is $4,800. She has never claimed an education credit.

Which of the following is the correct education credit treatment for her 2025 return?

She may claim the Lifetime Learning Credit of $1,400, because the employer's payment is excluded from her wages and does not reduce qualified expenses.
She may claim the Lifetime Learning Credit of $900, using only the $4,500 of tuition not paid by the tax-free employer assistance.
She may claim the American opportunity credit of $2,500, because she is enrolled at least half-time and has never claimed the credit.
She may claim no education credit, because the graduate certificate program is not a degree program.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Education Credits

Practice Education Credits in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Education Credits, giving you a quick way to practice the rules, question types, and explanations that matter most for SEE - Special Enrollment Exam.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A 40-year-old single client earned her bachelor's degree in 2019. In 2025 she enrolled half-time in a graduate certificate program at an eligible university to update her skills. Her 2025 tuition was $7,000; she paid $4,500 herself, and her employer paid $2,500 directly to the university under an educational assistance plan that is excluded from her wages. Her MAGI is $70,000 and her tax liability before credits is $4,800. She has never claimed an education credit.

Which of the following is the correct education credit treatment for her 2025 return?

  1. She may claim the Lifetime Learning Credit of $1,400, because the employer's payment is excluded from her wages and does not reduce qualified expenses.
  2. She may claim the Lifetime Learning Credit of $900, using only the $4,500 of tuition not paid by the tax-free employer assistance. (correct answer)
  3. She may claim the American opportunity credit of $2,500, because she is enrolled at least half-time and has never claimed the credit.
  4. She may claim no education credit, because the graduate certificate program is not a degree program.
Explanation: The Lifetime Learning Credit under IRC §25A(c)(1) is 20% of qualified tuition and related expenses paid by the taxpayer. Under IRC §25A(g), qualified expenses must be reduced by tax-free educational assistance, including employer-provided assistance excluded under IRC §127. Because the $2,500 employer payment is excluded from the client's wages, only the $4,500 she paid herself is qualified; 20% of $4,500 is $900. Her MAGI is below the LLC phase-out range, and her $4,800 pre-credit tax liability is sufficient to absorb the nonrefundable credit. The American opportunity credit under IRC §25A(b) is unavailable because she had completed the first four years of postsecondary education before 2025. Choice A misstates the assistance-reduction rule; Choice C ignores the first-four-years bar; Choice D is wrong because the Lifetime Learning Credit has no degree-program requirement.

Question 2

A single taxpayer, not claimed as a dependent, is a full-time third-year undergraduate in 2025. In August 2025 she paid $6,000 for the fall 2025 semester. In December 2025 she paid $5,000 for the spring 2026 semester, which begins on January 21, 2026. She received no scholarships or education benefits. Her MAGI is $60,000 and her tax liability before credits is $2,100. She has never claimed an American opportunity credit.

Which of the following is correct for her 2025 return?

  1. Only the $6,000 fall payment is qualified for 2025; the $5,000 spring prepayment must be claimed on her 2026 return.
  2. Both payments are qualified for 2025 because the spring term begins in the first three months of 2026, and her credit is $2,500. (correct answer)
  3. Both payments are qualified for 2025, but her credit is $2,000 because the credit is 20% of the first $10,000 of expenses.
  4. Neither payment is qualified for 2025 because tuition is treated as paid when the academic period begins.
Explanation: Under the prepaid-expense rule in IRC §25A(g)(4), qualified tuition paid in 2025 for an academic period beginning in the first three months of 2026 is treated as paid in 2025. The fall 2025 payment is qualified in 2025, and the spring 2026 payment is also qualified in 2025 because the spring term begins January 21, 2026. Total qualified expenses are $11,000, and the American opportunity credit is capped at 2,500.ChoiceAandChoiceDmisapplytheprepaymentrule;ChoiceCusestheLifetimeLearningCredit′s202,500. Choice A and Choice D misapply the prepayment rule; Choice C uses the Lifetime Learning Credit's 20%/10,000 structure rather than the AOTC formula.

Question 3

A married couple files jointly for 2025 and claims their son, a full-time sophomore at an eligible university, as a dependent. Their MAGI is $165,000. The son's 2025 tuition was $6,000; he paid $5,000 of it from his own savings, and a $1,000 tax-free grant was paid directly to the university for the remaining $1,000. The couple has no other education expenses and has sufficient tax liability to use any nonrefundable credit.

What amount of American opportunity credit may the couple claim for 2025?

  1. $2,500, because their son is a dependent and the tuition expenses are treated as paid by the couple.
  2. $2,250, because the credit is reduced by $50 for each $1,000 (or part) of MAGI over the $160,000 threshold.
  3. $1,875, after reducing the qualified expenses by the tax-free grant and applying the joint-return phase-out. (correct answer)
  4. $0, because the tuition was paid from the son's own savings rather than by the parents.
Explanation: IRC § 25A(g) treats qualified expenses paid by a dependent student as paid by the taxpayer claiming the dependency, and requires qualified expenses to be reduced by tax-free educational assistance. The son's qualified expenses are $6,000 − $1,000 = $5,000. Because the AOTC is 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, the tentative credit is $2,000 + (25% × $2,000) = 2,500.UnderIRC§25A(d),thejoint−returnphase−outleaves752,500. Under IRC § 25A(d), the joint-return phase-out leaves 75% of the credit: (180,000 − 165,000)/(165,000) / (180,000 − $160,000) = 75%, so the credit is $2,500 × 75% = $1,875. Choice A states the pre-phase-out maximum and ignores the phase-out; Choice B uses a CTC-style 50−per−50-per-1,000 reduction rather than the § 25A(d) proportional reduction; Choice D misstates the dependent-payment rule.

Question 4

A 20-year-old single taxpayer is a full-time junior and lives with her parents, who provide more than half of her support. Her parents could properly claim her as a dependent for 2025, but they do not because their MAGI is above the education-credit phase-out range. She paid $5,000 of tuition in 2025 from her own earnings. Her earned income of $14,000 is less than half of her total support, and it is also her MAGI. Her tax liability before credits is $250. She has not claimed an education credit in any earlier year and wants to claim one on her own return.

Which of the following is correct?

  1. She may claim an American opportunity credit of $2,500, because she paid the tuition and her parents did not claim her.
  2. She may claim an American opportunity credit of $1,250: the $1,000 refundable portion plus $250 used against her tax.
  3. She may not claim the American opportunity credit or the Lifetime Learning Credit, because she can be claimed as a dependent.
  4. She may claim an American opportunity credit of $250, because no part of her credit is refundable and it is limited to her tax. (correct answer)
Explanation: Treas. Reg. § 1.25A-1(f)(1) and IRC § 25A(g)(3) and (i). When another taxpayer is eligible to claim a student as a dependent but does not, only the student may claim the education credit. Her tentative American opportunity credit is $2,000 + (25% × $2,000) = $2,500. Under IRC § 25A(i), the 40% refundable portion is not allowed to a child to whom the kiddie tax rules of IRC § 1(g) apply: she is a full-time student under 24 whose earned income does not exceed half of her support, a parent is living, and she does not file jointly. Her whole credit is therefore nonrefundable and is limited to her $250 of tax. Choice D is correct. Choice A ignores both the refundability bar and the tax-liability limit. Choice B allows the $1,000 refundable portion, which IRC § 25A(i) denies to a student in her position. Choice C treats the ability to be claimed as the bar; the bar applies only when the other taxpayer actually claims her.

Question 5

A married couple, filing jointly and claiming both children as dependents, has MAGI of $145,000 and tax liability of $5,000 before credits. Their daughter is a full-time junior at an eligible university, and they paid $6,000 of her 2025 tuition. Their son is a full-time first-year graduate student at an eligible university, and they paid $8,000 of his 2025 tuition. Neither child received scholarships.

Which education credits may the couple properly claim for 2025?

  1. An American opportunity credit of $2,500 for the daughter and a Lifetime Learning Credit of $1,600 for the son. (correct answer)
  2. An American opportunity credit of $2,500 for the daughter and a Lifetime Learning Credit of $2,000 for the son.
  3. An American opportunity credit of $2,500 for each child, because each child is enrolled at least half-time in an eligible program.
  4. An American opportunity credit of $2,500 for the daughter only, because a taxpayer may claim only one education credit per return.
Explanation: IRC §25A(i) allows the American opportunity credit for each eligible student, and IRC §25A(c)(1) allows a Lifetime Learning Credit of 20% of qualified expenses, subject to a $10,000 expense cap per return. The daughter is in her junior year, so the couple may claim the AOTC capped at $2,500. The son is a graduate student, so no AOTC is available, but the LLC is available; 20% of $8,000 is $1,600. The couple's MAGI is below the $160,000–$180,000 MFJ phase-out, and their tax liability before credits is enough to allow the nonrefundable credits. Claiming the AOTC for one student does not bar the LLC for a different student. Choice B incorrectly treats the LLC's $2,000 maximum as available without applying 20% to the $8,000 actually paid for the son; Choice C ignores the graduate-student AOTC bar; Choice D misstates the rule as only one education credit per return.

Question 6

A married taxpayer lived apart from her husband for all of 2025 and will file as married filing separately. Her husband has not paid any education expenses and will not claim their daughter as a dependent. She paid $4,000 of 2025 tuition for their daughter, a full-time sophomore at an eligible university. Her MAGI is $75,000 and her tax liability before credits is $1,500.

Which of the following is correct regarding any education credit she may claim for 2025?

  1. She may claim an American opportunity credit of $1,500, limited to her tax liability because the credit is nonrefundable.
  2. She may claim an American opportunity credit of $2,500 because she paid the tuition and claims her daughter as a dependent.
  3. She may claim a Lifetime Learning Credit of $800 because she paid the tuition and her MAGI is below the phase-out range.
  4. She may claim no education credit because taxpayers who file a separate return while married are barred from claiming either credit. (correct answer)
Explanation: IRC §25A(g) disallows the American opportunity credit and the Lifetime Learning Credit to a married taxpayer who files a separate return; living apart during the year does not, by itself, create an exception. The tuition and dependent-child facts would matter only if she were not barred by her filing status. Choice A misstates the AOTC as wholly nonrefundable and overlooks the bar; Choice B overlooks the bar; Choice C correctly computes the LLC amount on these tuition facts but overlooks the bar.

Question 7

For 2025, a married couple filing jointly claims two children as dependents. The daughter is a full-time freshman at a university, has no felony drug conviction, and has never claimed the American opportunity credit; the son, age 23, is a full-time graduate student. The couple pays all of their education expenses. The daughter had $8,000 in tuition and required fees and $1,000 in required books and supplies, and she received a $5,000 tax-free scholarship. The son had $12,000 in tuition and required fees. The couple's modified adjusted gross income for education-credit purposes was $170,000, and their total tax before education credits was $1,400. They have no other credits.

What is the total education-credit benefit they may claim on their 2025 return?

  1. $1,250
  2. $1,400
  3. $1,900 (correct answer)
  4. $2,250
Explanation: IRC § 25A and the Form 8863 instructions. The couple may claim the AOTC for one student and the LLC for another in the same year. Daughter's qualified expenses are $8,000 + $1,000 - $5,000 = $4,000, so the tentative AOTC is $2,500. The son's $12,000 of graduate tuition is limited to the LLC's $10,000 per-return expense cap, so the tentative LLC is 20% x $10,000 = $2,000. With MFJ MAGI of 170,000,thephaseoutis(170,000, the phaseout is (170,000 - $160,000) / $20,000 = 50%. Thus the AOTC is 1,250,ofwhich401,250, of which 40% (500) is refundable and $750 is nonrefundable; the LLC is $1,000 nonrefundable. The combined after-phaseout credits are $2,250, but the nonrefundable total is $1,750 and their tax is only $1,400, so only $1,400 of nonrefundable credits is allowed. Adding the $500 refundable AOTC gives 1,900.ChoiceA(1,900. Choice A (1,250) computes only the daughter's AOTC and omits the son's LLC. Choice B ($1,400) treats the combined credits as entirely nonrefundable and limits them to tax, ignoring the 500refundableAOTC.ChoiceD(500 refundable AOTC. Choice D (2,250) applies the phaseout correctly but ignores the limitation on nonrefundable credits.

Question 8

For 2025, a single taxpayer, age 24, cannot be claimed as a dependent. She is in her third year of undergraduate study, was enrolled at least half-time for the full year, has no felony drug conviction, and has never claimed the American opportunity credit. Her Form 1098-T reported $7,600 in tuition and required fees, and she paid $500 for required course books and supplies. She received a $3,400 tax-free scholarship. Her modified adjusted gross income for education-credit purposes was $84,000, and her total tax before any education credit was $1,200. She has no other credits.

What is the total benefit she will receive from the American opportunity credit for 2025?

  1. $1,000
  2. $1,500 (correct answer)
  3. $1,900
  4. $2,200
Explanation: IRC § 25A and the Form 8863 instructions. Qualified AOTC expenses are tuition, required fees, and course materials, reduced by tax-free scholarships: $7,600 + $500 - $3,400 = $4,700. Because this exceeds $4,000, the tentative AOTC is the maximum $2,500 (100% of the first $2,000 plus 25% of the next $2,000). For a single filer, the AOTC phases out between $80,000 and $90,000 of MAGI. At 84,000,thereductionis(84,000, the reduction is (84,000 - $80,000) / $10,000 = 40%, so the allowable credit is $2,500 x 60% = $1,500. Forty percent of the allowable credit is refundable: $600. The remaining $900 is nonrefundable; because her tax before credits is $1,200, the $900 is fully allowed. Total benefit is $600 + $900 = 1,500,whichisChoiceB.ChoiceA(1,500, which is Choice B. Choice A (1,000) is 40% of the $2,500 tentative credit before the MAGI phase-out; it takes the pre-phase-out refundable amount as the total benefit, not the 600refundableportionafterthephase−outplusthenonrefundableportion.ChoiceC(600 refundable portion after the phase-out plus the nonrefundable portion. Choice C (1,900) computes the refundable portion from the $2,500 tentative credit before the MAGI phaseout and then adds the 900post−phaseoutnonrefundableamount.ChoiceD(900 post-phaseout nonrefundable amount. Choice D (2,200) omits the phaseout but applies the tax limitation to the full nonrefundable credit: $1,000 refundable + $1,500 nonrefundable limited to $1,200.

Question 9

A single taxpayer, age 21, cannot be claimed as a dependent by another taxpayer and is a full-time third-year undergraduate in 2025. During the year she paid $5,000 in tuition and $800 for required books. She received a $3,000 tax-free Pell grant, all of which was applied to her qualified expenses. Her MAGI is $22,000, and her earned income exceeds one-half of her own support. Her tax liability before any education credits is $750. She has no other education benefits.

What is the total tax benefit she receives from the American opportunity credit for 2025 (including any refundable credit and any reduction in tax)?

  1. $1,630; the $880 refundable portion plus the $750 of the nonrefundable portion that her tax liability allows. (correct answer)
  2. $1,750; the result of computing the credit without reducing qualified expenses by the Pell grant and then applying the tax liability limit.
  3. $880; only the 40% refundable portion, ignoring the nonrefundable portion.
  4. $1,320; only the 60% nonrefundable portion, ignoring both the refundable portion and the tax liability limit.
Explanation: Under IRC §25A(i), the American opportunity credit equals 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, and 40% of the resulting amount is refundable. Because the facts do not elect to include the Pell grant in income, IRC §25A(g) requires the $3,000 tax-free grant to reduce qualified expenses. The qualified expenses are $5,800 - $3,000 = $2,800, so the tentative credit is $2,000 + (25% of $800) = $2,200. The refundable portion is $880; the limitation on the refundable portion for full-time students under age 24 does not apply because her earned income exceeds one-half of her support. The nonrefundable portion is $1,320, but it is limited to her $750 tax liability, so the total benefit is $880 + $750 = $1,630. Choice B computes the credit without reducing expenses by the Pell grant, producing a $2,500 tentative credit; after the $750 tax limit on the nonrefundable portion and the $1,000 refundable portion, the total would be $1,750. Choice C takes only the refundable portion. Choice D takes only the nonrefundable portion and ignores both the tax limit and the refundable portion.

Question 10

For 2025, a single taxpayer, age 30, cannot be claimed as a dependent and is not eligible for the American opportunity credit. A university charged her $6,500 in tuition for graduate courses, of which her employer paid $2,500 directly to the university under a tax-free educational assistance program and she paid the remaining $4,000. She also paid $900 in required lab fees that the university included on her bill. She bought a $300 calculator from an off-campus store; no course required it. Her modified adjusted gross income for education-credit purposes was $84,000, and her total tax before education credits was $2,000. She has no other credits.

What is the amount of her lifetime learning credit for 2025?

  1. $588 (correct answer)
  2. $624
  3. $888
  4. $980
Explanation: IRC § 25A and the Form 8863 instructions. For the LLC, qualified expenses are tuition and required fees, reduced by tax-free educational assistance. The $6,500 tuition plus $900 in required lab fees is $7,400; subtract the $2,500 employer assistance to get $4,900. The calculator is not a qualified LLC expense. The tentative credit is 20% x $4,900 = $980. For a single filer, the LLC phases out between $80,000 and $90,000 of MAGI. At $84,000, 40% is phased out, leaving $980 x 60% = $588. Her tax before credits is 2,000,sothenonrefundablecreditisnotlimited.ChoiceB(2,000, so the nonrefundable credit is not limited. Choice B (624) includes the 300calculatorintheexpensebasebutotherwiseappliesthephaseout.ChoiceC(300 calculator in the expense base but otherwise applies the phaseout. Choice C (888) fails to reduce qualified expenses by the employer assistance. Choice D ($980) uses the correct expense base but omits the MAGI phaseout.

Question 11

Which of the following is correct regarding eligibility for the American Opportunity Credit for 2025?

  1. For 2025, the credit may be claimed for a dependent who is enrolled less than half-time during the dependent's first year of postsecondary education at an eligible institution, provided the taxpayer does not also claim the Lifetime Learning Credit for that student in 2025 and the dependent has no felony drug conviction.
  2. For 2025, the credit may be claimed for a student who has completed a bachelor's degree and is enrolled at least half-time in a graduate degree program at an eligible institution, if the student is pursuing a recognized credential and has not previously had the credit claimed in four or more tax years.
  3. For 2025, the credit may be claimed for a student who is enrolled at least half-time for an academic period beginning in 2025 in a program leading to a recognized educational credential at an eligible institution, has not completed the first four years of postsecondary education, has not been convicted of a felony drug offense by the end of 2025, and has not had the credit claimed in four or more prior tax years. (correct answer)
  4. For 2025, the credit may be claimed by a married taxpayer filing separately for a qualifying child who is enrolled at least half-time at an eligible institution, if the other spouse does not claim the child on a separate return and the taxpayer's MAGI is below the applicable phase-out threshold.
Explanation: IRC § 25A and the Form 8863 instructions require, for the American Opportunity Credit, that the student be enrolled at least half-time for an academic period beginning in the tax year in a program leading to a degree, certificate, or other recognized educational credential, have not completed the first four years of postsecondary education before the tax year, have no felony drug conviction by the end of the tax year, and have not had the credit claimed for that student in four or more prior tax years. Choice C states these requirements. Choice A misstates the enrollment rule: even a first-year student must be enrolled at least half-time. Choice B misstates the educational-level rule: the credit is limited to the first four years of postsecondary education, and a student who has completed a bachelor's degree and is enrolled in a graduate program is outside that period. Choice D misstates the filing-status rule: married taxpayers filing separately may not claim the education credits, regardless of MAGI or which spouse claims the child.

Question 12

Which of the following is correct regarding qualified education expenses for the education credits for 2025?

  1. For the Lifetime Learning Credit, qualified education expenses include tuition and required enrollment fees, but books, supplies, and equipment qualify only if they must be paid to the institution as a condition of enrollment or attendance. (correct answer)
  2. For the American Opportunity Credit, qualified education expenses include books, supplies, and equipment only if those amounts were paid directly to the eligible educational institution.
  3. For both credits, qualified education expenses include reasonable room and board if the student is enrolled at least half-time in a degree or certificate program at an eligible institution.
  4. Qualified education expenses paid in 2025 for an academic period beginning in April 2026 are treated as paid in 2025 for purposes of both credits.
Explanation: IRC § 25A(f) and Treas. Reg. § 1.25A-2(d) define qualified tuition and related expenses for the education credits. For the Lifetime Learning Credit, qualified expenses are tuition and fees required for enrollment or attendance; amounts for books, supplies, and equipment qualify only if they are required to be paid to the institution as a condition of enrollment or attendance. Choice A is correct. Choice B applies the Lifetime Learning Credit rule to the American Opportunity Credit: under § 25A(i)(3), course materials needed for the course of study qualify for the AOTC even if they are not purchased from the school. Choice C is wrong because room and board are not qualified education expenses for either credit. Choice D misstates the prepayment rule: expenses paid in 2025 are treated as paid in 2025 only when the academic period begins in the first three months of 2026, and April 2026 is outside that window.

Question 13

In 2025, a single taxpayer who is not claimed as a dependent by another taxpayer had MAGI of $70,000 and a regular tax liability before credits of $400. She paid $4,000 of qualified education expenses for her own second-year undergraduate study at an eligible institution, was enrolled at least half-time, and has never claimed the American Opportunity Credit. She meets all other AOTC eligibility requirements.

What total amount of the American Opportunity Credit may she claim for 2025, including any refundable portion?

  1. $400
  2. $1,000
  3. $2,500
  4. $1,400 (correct answer)
Explanation: IRC §25A(i) allows the American Opportunity Credit equal to 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, with a $2,500 maximum per student. Her $4,000 of expenses gives a $2,500 credit. Because her MAGI is below the $80,000 phase-out threshold for a single taxpayer, the credit is not reduced. Forty percent of the credit, $1,000, is refundable; the remaining $1,500 is nonrefundable and is limited to her $400 tax liability. The total credit allowed is therefore $1,400. Choice A treats the entire credit as nonrefundable and limits it to the tax liability. Choice B counts only the refundable portion. Choice C ignores the tax-liability limit on the nonrefundable portion.

Question 14

Which of the following is correct regarding the coordination of education credits with qualified tuition program distributions for 2025?

  1. A taxpayer may claim an education credit for the full amount of qualified expenses even if those expenses were paid with a tax-free distribution from a qualified tuition program.
  2. A taxpayer who receives a tax-free distribution from a qualified tuition program may allocate the student's qualified expenses between the credit and the distribution, but may not use the same expenses for both. (correct answer)
  3. Any qualified expenses paid with a tax-free distribution from a qualified tuition program are permanently disqualified from the education credit, including in later tax years.
  4. A taxpayer may claim an education credit for expenses paid by a qualified tuition program distribution only if the taxpayer waives the exclusion for the entire distribution.
Explanation: IRC §25A(g) and Publication 970 coordinate the education credits with tax-free education benefits. The same expense cannot generate both an education credit and a tax-free distribution from a qualified tuition program. A taxpayer may apply the distribution to one portion of the student's qualified expenses and claim the credit on a different portion, as long as no expense is used twice. Choice B states this rule. Choice A would double-count the same expenses. Choice C is wrong because the disallowance applies only to expenses used to support the tax-free distribution, and it is not a permanent disqualification of other qualified expenses. Choice D is wrong because the law does not require waiving the exclusion for the entire distribution; allocation is permitted.

Question 15

In 2025, a married couple filing jointly had MAGI of $165,000 and a regular tax liability before credits of $2,400. The husband paid $9,000 in tuition for two graduate-level courses at an eligible university and received a $2,000 tax-free scholarship. They have no other qualified education expenses. Assume all other requirements for the credit are met.

What amount of the Lifetime Learning Credit may the couple claim for 2025?

  1. $1,350
  2. $1,050 (correct answer)
  3. $1,400
  4. $1,500
Explanation: IRC §25A(c) allows a Lifetime Learning Credit of 20% of qualified expenses up to $10,000, and IRC §25A(d) phases the credit out for married taxpayers filing jointly with MAGI between $160,000 and $180,000. The tax-free scholarship reduces qualified expenses to $9,000 - $2,000 = $7,000. The credit before phase-out is 20% × $7,000 = 1,400.Thephase−outreductionis(1,400. The phase-out reduction is (165,000 - 160,000)/(160,000) / (180,000 - $160,000) = 25%, so the allowable credit is $1,400 × 75% = $1,050. Choice B is correct. Choice A applies the phase-out but fails to reduce qualified expenses by the scholarship. Choice C ignores the phase-out. Choice D uses the $10,000 statutory maximum as the expense base before the phase-out rather than the $7,000 actually qualified.