Graduate Student Here: What's the best way to file for Lifetime Learning Credit with Fellowships?

The Lifetime Learning Credit can definitely be tricky with fellowship income! The important thing to understand is how your fellowship is reported. If the fellowship appears on a W-2, it's treated differently than if it was reported on a 1098-T. With fellowship income, only the portion used for qualified education expenses (tuition, required fees) is tax-exempt. Any amount used for living expenses, housing, etc. is generally taxable. For the Lifetime Learning Credit specifically, you can claim 20% of up to $10,000 in qualified education expenses (maximum $2,000 credit), but you cannot "double-dip" - meaning you can't use the same expenses for both tax-free fellowship treatment AND the LLC. The discrepancy between tax programs likely comes from how they're treating your fellowship and education expenses. Cash App might be incorrectly allowing you to use expenses twice (for both fellowship exclusion and LLC), while FreeTaxUSA might be correctly preventing this.

Just wanted to share my experience with a similar situation. I was pulling my hair out trying to figure out the Lifetime Learning Credit with my fellowship until I found taxr.ai (https://taxr.ai). Their system analyzed my 1098-T and fellowship letter and actually showed me exactly how to allocate expenses between tax-free fellowship and the LLC. My situation was almost identical - had about $28k in fellowship and $12k in qualified expenses. The tool showed me that I was allocating things wrong - I was trying to use the same expenses for both the fellowship exclusion and the LLC which is probably why you're seeing different results between tax software.

I wanted to follow up about my experience with taxr.ai since I was skeptical at first. I decided to try it with my grad student fellowship situation, and it was actually super helpful! The analysis showed me exactly where I went wrong - I had been trying to claim the same tuition expenses for both tax-free fellowship treatment AND for the Lifetime Learning Credit. After getting the report, I went back to FreeTaxUSA and corrected my entries. Turns out I was eligible for a partial LLC, but I needed to properly allocate which portion of my fellowship was being used for qualified expenses. Ended up getting about $1,200 back instead of owing, which was a huge relief. It also explained why the tax programs were giving such different results - I was inputting information inconsistently between them.

If you're still confused after trying different tax software options, you might want to just call the IRS directly for clarification on how to properly claim the Lifetime Learning Credit with fellowship income. I know this sounds awful, but I used Claimyr (https://claimyr.com) to get through to an actual IRS agent without waiting on hold forever. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had a really similar issue last year with education credits and scholarship income. Called through Claimyr and got connected to an IRS agent in like 15 minutes who walked me through exactly how to report everything correctly. Saved me so much stress trying to guess which tax software was right.

I have to admit I was completely wrong about Claimyr. After struggling for days with my grad school fellowship tax situation, I decided to try it despite my skepticism. I was connected to an IRS tax law specialist in about 20 minutes who actually dealt with education credits regularly. The agent walked me through exactly how to allocate my fellowship income between qualified education expenses (which can be tax-free) and how much I could then use toward the Lifetime Learning Credit. She even emailed me the specific sections of Publication 970 that applied to my situation. Turns out both tax programs I tried were partially wrong - Cash App was letting me double-dip incorrectly, but FreeTaxUSA wasn't allowing me to properly allocate my fellowship. Ended up filing with FreeTaxUSA but with the correct allocations the agent helped me understand. Saved me at least $2,000 in taxes!

I'm a tax preparer and see this problem with education credits all the time. Here's a simplified explanation: 1) Fellowships are tax-free ONLY for amounts used for qualified education expenses 2) Any fellowship money used for living expenses is taxable 3) For the Lifetime Learning Credit, you can only use expenses not already covered by tax-free education assistance So if you have $30,000 fellowship and $13,500 in qualified expenses, $13,500 of your fellowship is tax-free and the remaining $16,500 is taxable. But here's the catch - those same $13,500 expenses used to make part of your fellowship tax-free CAN'T also be used for the LLC. If you had additional qualified expenses beyond what you used for the tax-free fellowship portion, those could potentially be used for the LLC.

Has anyone used TaxSlayer for this situation? I'm in almost the identical situation with fellowship and education credits but don't want to pay for TurboTax.