Is the 1098-T Taxable? Scholarship Rules and Qualified Expenses

The Form 1098-T is not itself taxable. It is an informational statement your school sends to you and the IRS reporting tuition payments in Box 1 and scholarships and grants in Box 5. Whether you owe tax because of a 1098-T comes down to one comparison: if the scholarships and grants in Box 5 exceed your qualified education expenses, the excess is taxable income to the student. If they don’t, nothing on the form creates a tax bill.¹

What the Form Actually Is

Every accredited college, university, and vocational school participating in federal student aid files a 1098-T for each enrolled student with a reportable financial transaction during the year.² It reports narrow information, not a full accounting of what you spent on school.

Box 1 shows total payments the school received for qualified tuition and related expenses during the calendar year, minus any refunds issued that same year.³
Box 4 shows adjustments to amounts reported for a prior year, typically a refund of tuition you paid last year. A number here may require recalculating a credit claimed on a prior return.
Box 5 shows total scholarships and grants the school processed on your behalf, including Pell Grants, institutional awards, and third-party scholarships administered through the school.⁴

No tax is withheld on scholarship money, so the form itself is a report, not a settlement. What matters for taxes is the math you do after it arrives.

When Scholarships Become Taxable

A scholarship or grant is tax-free only to the extent it pays for qualified education expenses: tuition, required fees, and course materials required for enrollment. The moment scholarship dollars exceed those expenses, the excess is taxable income for the student. This holds whether the money was paid directly to you or applied to your school account.¹

The calculation is direct. Subtract your total qualified education expenses from Box 5. If Box 5 is larger, the difference is the taxable portion. Because nothing is withheld, that amount can create a bill in April or, if it’s large enough, an obligation to make quarterly estimated payments during the year.

One condition catches people off guard: to exclude any scholarship from income, you generally need to be pursuing a degree at an accredited institution. A grant for a non-degree workshop or professional seminar is usually taxable in full regardless of what it pays for.

What Counts as a Qualified Education Expense

Qualified expenses are what turn scholarship dollars tax-free. The IRS defines them as tuition, fees, and course materials required for enrollment or attendance at an eligible institution.⁵

Always qualified: tuition, mandatory enrollment fees, activity or technology fees required as a condition of enrollment, and course materials (books, supplies, and equipment) required for your courses.
Never qualified: room and board, health insurance, transportation, and optional fees. Scholarship money spent on these costs is taxable.

The line runs between “required by the institution” and “helpful for school.” A graphing calculator your syllabus says you must own is qualified. A new desk for your apartment isn’t, even if you study at it every night. When in doubt, check whether the school or the course syllabus mandates the purchase.

Two more notes on the numbers. Box 1 almost certainly understates what you actually spent, because your school only reports tuition and required fees paid directly to it. Textbooks, lab supplies, and required equipment you bought elsewhere aren’t in Box 1, but they still count toward qualified expenses on your side of the math.⁶ Keep the receipts.

How to Report Taxable Scholarship Income

If your scholarships exceed your qualified expenses, report the taxable portion on Schedule 1, line 8r of Form 1040.⁷ If instead your school reported the taxable portion on a W-2, which happens with some teaching or research fellowships, it goes on line 1a of Form 1040.¹

Because nothing was withheld, a large excess can produce an unexpected bill. If you expect to owe more than $1,000 when you file, quarterly estimated payments during the year help avoid an underpayment penalty. Students with modest taxable amounts and no other income often fall below the filing threshold and owe nothing, though filing may still be worthwhile if a refundable credit is in play.

One boundary worth knowing: for dependent students under 19, or under 24 if full-time students, unearned income above $2,700 can trigger the kiddie tax, which taxes the child’s income at the parent’s rate on Form 8615.⁸ Taxable scholarship income for a degree-seeking student is generally treated as earned income for standard deduction purposes, so the kiddie tax typically does not apply to it. Students with significant investment income alongside taxable scholarships should still check whether they cross the $2,700 threshold on their unearned income alone.

The Choice to Make Some Scholarship Money Taxable on Purpose

You are not required to apply your scholarships to tuition first. The IRS lets you choose whether to treat scholarship dollars as covering tuition (tax-free, but using up the expenses that could support a credit) or as covering living expenses like room and board (taxable, but preserving your tuition dollars for the American Opportunity Tax Credit).⁹

Why volunteer to pay tax on scholarship money? Because the AOTC can be worth up to $2,500 per student, and it takes $4,000 in unreimbursed qualified expenses to reach the maximum. If scholarships cover all your tuition, you have no qualified expenses left for the credit unless you deliberately treat some of that scholarship as taxable. A student in a low bracket might owe a few hundred dollars on the reclassified amount and receive $1,000 in refundable credit in return.⁹

You make this election simply by how you fill out the return. Report the portion you’re treating as taxable on Schedule 1, and use the remaining qualified expenses to calculate the credit on Form 8863. There’s no separate form for the choice itself. Running the numbers both ways before filing usually pays for itself.

Who Reports What When the Student Is a Dependent

If the student is claimed as a dependent on someone else’s return, the student cannot claim an education credit. Only the person who claims the dependent can.¹⁰ A parent claiming their college-age child files Form 8863 and receives the credit, even if the student paid tuition out of their own account.

Taxable scholarship income, however, always belongs to the student. If a 20-year-old dependent has $3,000 in excess scholarship income, that $3,000 goes on the student’s own return, not the parent’s. The parent claims the credit; the student reports the taxable scholarship. Getting this split wrong is an easy way to draw an IRS notice.

Reconciling the Form With Your Own Records

The 1098-T is a starting point. The IRS acknowledges Box 1 may not match what you actually paid and tells you to use your own records when completing Form 8863.⁶ Timing differences are the usual reason: a payment you made in December for a January semester may land in a different tax year on the school’s books than on yours.

Pull together your bursar statements, bank records, and receipts for any education-related purchases. Compare them with Box 1, and add any required books and supplies you bought out of pocket to your qualified expense total. If Box 5 includes a scholarship that was later returned or reduced mid-year, confirm that the adjustment appears in Box 6. Schools make reporting errors, and the IRS holds you responsible for what ends up on your return.

1
Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
2
Internal Revenue Service. About Form 1098-T, Tuition Statement
3
Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2025) – Section: Specific Instructions for Form 1098-T
4
Office of the Law Revision Counsel. 26 USC 6050S – Returns Relating to Higher Education Tuition and Related Expenses
5
Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2025) – Section: Qualified Tuition and Related Expenses
6
Internal Revenue Service. Instructions for Form 8863 (2025) – Section: Form 1098-T Requirement
7
Internal Revenue Service. Instructions for Form 1040 (2025) – Section: Schedule 1 Line 8r
8
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
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Internal Revenue Service. The Interaction of Scholarships and Tax Credits
10
Internal Revenue Service. Education Credits: American Opportunity Tax Credit and Lifetime Learning Credit