In most cases, a 1098-T raises your tax refund rather than lowers it, because it supplies the numbers you need to claim an education tax credit worth up to $2,500 per student. The form itself doesn’t change your tax bill. It reports what your school received in tuition payments and what it paid out in scholarships, and those figures flow onto Form 8863 where the credit is calculated. There is one common situation where entering a 1098-T will shrink your refund: when the scholarships and grants in Box 5 exceed the qualified tuition and fees in Box 1. The excess is taxable income, and it can turn an expected refund into a smaller one or even a balance due.
When the 1098-T Increases Your Refund
A tax credit reduces what you owe dollar for dollar. If your paycheck withholding already covered your tax bill for the year, a credit turns that coverage into an overpayment, and the IRS sends the overpayment back as a larger refund.
The American Opportunity Tax Credit does the most work here. It’s worth up to $2,500 per eligible student, calculated as 100% of the first $2,000 in qualified expenses plus 25% of the next $2,000. Forty percent of the AOTC is refundable, meaning that after the credit wipes out your tax liability, up to $1,000 of what’s left gets paid to you as cash.1Internal Revenue Service. American Opportunity Tax Credit
A quick example shows the effect. A college student earns $12,000 at a part-time job and has $600 withheld for federal tax. After the standard deduction, actual tax owed is small. The AOTC first eliminates that tax entirely. Then up to $1,000 of the remaining credit is added to the refund on top of the $600 already withheld. The refund ends up well above $1,000 on a tax bill that was close to zero.2Internal Revenue Service. Education Credits – AOTC and LLC
The Lifetime Learning Credit also uses the 1098-T figures and provides up to $2,000 per return, but it is entirely non-refundable. It can bring your tax to zero; any unused portion disappears rather than coming back as cash.3Internal Revenue Service. Lifetime Learning Credit – LLC Either way, entering the 1098-T almost always helps when you have real out-of-pocket tuition costs.
When the 1098-T Lowers Your Refund
Watching your refund drop after typing in a 1098-T usually traces back to one number: Box 5. Scholarship money used for tuition, fees, books, and required supplies is tax-free. Anything beyond that, including scholarship dollars that went to room and board, travel, or other living costs, is taxable income you have to report.4Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
Say you received a $20,000 scholarship and your qualified tuition and fees totaled $14,000. The remaining $6,000 that covered housing and meals is taxable. That amount gets added to your gross income, raises your tax, and reduces your refund. Many students see this exact pattern in their tax software and don’t understand where their refund went.
Payments you receive for teaching or research required as a condition of a scholarship are also taxable, even when the money is labeled a scholarship. The narrow exceptions are amounts received under the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program.4Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
There’s a second hit layered on top. Scholarships applied to tuition reduce the pool of qualified expenses available for your education credit. If scholarships covered all your tuition, you may have no qualified expenses left to generate any credit at all. The worst-case combination is a taxable scholarship excess with nothing left over to produce an offsetting credit.
Reading the Boxes That Drive the Outcome
Your school sends Form 1098-T to you and to the IRS each January, summarizing the tuition-related money that moved through your account in the prior calendar year.5Internal Revenue Service. About Form 1098-T, Tuition Statement Three boxes matter for whether your refund goes up or down:
- Box 1 reports total payments the school received for qualified tuition and related expenses from all sources during the year.6Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2026)
- Box 4 reports adjustments to a prior year’s 1098-T, such as a tuition refund of amounts already reported.
- Box 5 reports total scholarships or grants the school administered during the year.6Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2026)
The comparison between Box 1 and Box 5 is what tells you which direction your refund is likely to move. Box 1 larger than Box 5 means you have qualified expenses left to generate a credit. Box 5 larger than Box 1 means you probably have taxable scholarship income to report.
Things That Can Zero Out the Benefit
A few situations will keep the 1098-T from helping your refund even when the math looks right.
Income limits phase out both credits at the same thresholds. The full credit is available with modified adjusted gross income of $80,000 or less ($160,000 or less for joint filers), phases down between $80,000 and $90,000 ($160,000 to $180,000 jointly), and disappears above the top of the range.7Office of the Law Revision Counsel. 26 US Code 25A – American Opportunity and Lifetime Learning Credits
Married filing separately is a hard disqualifier. You cannot claim either credit on a separate return.7Office of the Law Revision Counsel. 26 US Code 25A – American Opportunity and Lifetime Learning Credits
If a parent claims you as a dependent, you can’t claim the credit on your own return. The parent files Form 8863 and gets the credit, even if you paid the tuition yourself.2Internal Revenue Service. Education Credits – AOTC and LLC Families sometimes lose the credit entirely because the parent assumes the student took it and the student assumes the parent did. Confirm who’s claiming whom before either return goes out.
A 529 or Coverdell distribution in the same year complicates things. You can take a tax-free distribution and claim a credit in the same year, but not using the same dollars of expenses for both. Reduce your total qualified expenses by any tax-free distribution first; whatever’s left is what you can use for the credit.8Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education If the 529 withdrawal covered everything, there’s nothing left to generate a credit.
Add the Expenses Your 1098-T Leaves Off
The 1098-T usually understates what you spent. It captures tuition and mandatory fees paid to the school but misses textbooks and required course materials bought from a third-party retailer. You’re allowed to add those costs when calculating the AOTC, which can raise your credit above what Box 1 alone would produce. You need proof of payment to back it up.9Internal Revenue Service. Instructions for Form 8863 (2025)
Keep receipts for textbooks, required software, lab supplies, and equipment purchased for your courses. The 1098-T alone won’t satisfy the IRS if your return is questioned; your own records have to document every dollar on Form 8863.
If the numbers on your 1098-T look wrong, contact the financial aid or bursar’s office before you file. Errors in Box 1 or Box 5 are common, and filing with bad data can produce IRS notices later. Ask for a corrected form if the school agrees there was a mistake.