Box 5 on Form 1098-T is the total of all scholarships, fellowships, and grants your school received or administered on your behalf during the calendar year. That single figure drives two tax questions: whether part of your aid counts as taxable income, and how much of your tuition is left over to support an education tax credit. The way to read it is always in relation to Box 1, which shows what the school was paid for qualified tuition and related expenses.
What Goes Into Box 5
Box 5 captures aid that doesn’t have to be repaid and isn’t paid in exchange for work. Federal Pell Grants, state aid, institutional merit scholarships, tuition waivers, and third-party grants routed through the school all land here.
Several things do not. Student loans are never in Box 5, including subsidized federal loans. Work-study wages are excluded because they are pay for services and show up on a W-2 instead. If a scholarship required you to teach, do research, or perform other services as a condition of the award, that portion is generally treated as wages and reported separately.1Internal Revenue Service. Topic No. 421 – Scholarships, Fellowship Grants, and Other Grants
Reading Box 5 Against Box 1
Box 1 is the total of payments the school received for qualified tuition and related expenses during the year, and it is not reduced by scholarships or grants.2Internal Revenue Service. Instructions for Forms 1098-E and 1098-T So the comparison is clean: subtract Box 5 from Box 1.
If Box 1 is larger, you have net qualified expenses left over, and those expenses can support an education credit. If Box 5 is larger, the excess is the starting point for figuring out how much of your aid is taxable. That one subtraction is the whole frame.
When Scholarship Money Becomes Taxable
Scholarship dollars are tax-free only to the extent you use them for qualified tuition and related expenses, meaning tuition, enrollment fees, and books, supplies, and equipment required for your courses.3Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships You also have to be pursuing a degree at an eligible institution.
Any scholarship money that paid for room and board, travel, insurance, or other personal costs is taxable. So is any amount by which Box 5 simply exceeds your total qualified expenses for the year. If you received $15,000 in grants but paid only $12,000 in qualifying tuition and fees, the extra $3,000 is income you have to report.1Internal Revenue Service. Topic No. 421 – Scholarships, Fellowship Grants, and Other Grants
Taxable scholarship income is not subject to Social Security or Medicare taxes, because it isn’t pay for services. It is subject to federal income tax, and you are the one who has to track how the funds were used.
Where To Report the Taxable Portion
If part of your scholarship is taxable and was not reported on a W-2, you report it on Schedule 1 (Form 1040), line 8r, which flows to line 8 of Form 1040. If the taxable portion was reported on a W-2 because the award required services, it goes on Form 1040, line 1a.4Internal Revenue Service. Publication 970 – Tax Benefits for Education
Your school will not compute the taxable amount for you. The 1098-T is informational. You know whether your aid paid for tuition or for rent, and the IRS expects you to make the call.
How Box 5 Affects the AOTC and Lifetime Learning Credit
Before claiming an education credit, you have to reduce your qualified expenses by the tax-free portion of your scholarships and grants. This is the no-double-benefit rule: you cannot exclude scholarship money from income and also count the same expenses toward a credit.5Internal Revenue Service. No Double Education Benefits Allowed
If you paid $10,000 in qualified tuition and received $4,000 in tax-free grants, your net qualified expenses for credit purposes are $6,000. If Box 5 equals or exceeds Box 1, net expenses drop to zero and no credit is available at all. That’s the sting of a high Box 5.
The American Opportunity Tax Credit covers 100% of the first $2,000 in net qualified expenses plus 25% of the next $2,000, for up to $2,500 per eligible student, and 40% of it (up to $1,000) is refundable.6Internal Revenue Service. American Opportunity Tax Credit It also has a broader definition of qualified expenses than the 1098-T itself uses: required books, supplies, and equipment count even when purchased off-campus, so you may have qualified expenses that never appear in Box 1.7Internal Revenue Service. Qualified Education Expenses
The Lifetime Learning Credit is 20% of up to $10,000 in net qualified expenses, capped at $2,000 per return, with no limit on how many years you can claim it.8Internal Revenue Service. Lifetime Learning Credit It is stricter about materials: books, supplies, and equipment only count if you had to pay the school for them as a condition of enrollment.7Internal Revenue Service. Qualified Education Expenses
Choosing To Treat Part of Box 5 as Taxable
You are allowed to voluntarily treat part of your scholarship as taxable income in order to free up qualified expenses for the AOTC. The IRS explicitly permits this.5Internal Revenue Service. No Double Education Benefits Allowed
Here’s how the math plays out. Suppose scholarships and tuition both equal $8,000. Net qualified expenses are zero and the credit is zero. If you instead declare $4,000 of the scholarship as taxable, your net qualified expenses jump to $4,000, which is exactly the amount that maxes out the AOTC at $2,500. You owe income tax on the $4,000 you declared, but a student in the 10% or 12% bracket pays only $400 to $480 for it. The $2,500 credit more than covers that, and $1,000 of it is refundable.
The strategy works best when the student’s marginal rate is low and the AOTC is on the table. It is weaker for the LLC, which is not refundable and smaller relative to the tax cost. Run the numbers both ways before filing.
The Kiddie Tax Catch for Dependent Students
When a student is claimed as a dependent, the parent claims the education credit, but the taxable scholarship income stays on the student’s own return. That split alone trips up families.
It gets worse when the taxable amount is large. The IRS treats taxable scholarship income not reported on a W-2 as unearned income for kiddie tax purposes. If a dependent student’s total unearned income exceeds $2,700, the excess can be taxed at the parent’s marginal rate instead of the student’s.9Internal Revenue Service. Topic No. 553 – Tax on a Child’s Investment and Other Unearned Income The kiddie tax applies to dependents under 19, or full-time students under 24 who don’t earn more than half their own support.
This matters most when you are considering the voluntary-taxable move above. Electing to make $4,000 of a scholarship taxable to capture the AOTC could push a dependent past the kiddie tax threshold and eat into the benefit. Factor it in before you decide.
If Box 5 Looks Wrong, or Box 6 Has a Number
Schools make mistakes. If the Box 5 figure doesn’t match your financial aid records, contact the bursar or financial aid office and ask for a review. Only the school can issue a corrected 1098-T, which will be marked “Corrected” at the top. If the school refuses to fix it, or never issues a form at all, you still have to report accurately from your own records. Keep award letters, tuition bills, and payment receipts for at least three years after filing.
Box 6 is where the school reports a reduction to a prior-year scholarship or grant that originally hit Box 5. A number there means you may have overstated taxable scholarship income or understated net qualified expenses on an earlier return. Depending on the size, that could call for an amended return (Form 1040-X) for the affected year, which could mean a refund you didn’t know you had coming.