1098-T Box 5: Scholarships, Grants, and Tax Credits

Box 5 on Form 1098-T is where your school reports the total scholarships and grants it administered for you during the calendar year, and that figure directly reduces the qualified education expenses you can use to claim the American Opportunity Tax Credit or Lifetime Learning Credit. If Box 5 is large enough to erase your qualified expenses, it erases your credit along with them. In some cases you can push back on that result by choosing how to allocate the scholarship money, even if it means reporting part of it as taxable income.

What Box 5 Includes

Box 5 captures non-repayable aid the school processed on your behalf during the year. That covers institutional scholarships, federal Pell Grants, Supplemental Educational Opportunity Grants, tuition waivers, and payments from outside sponsors such as employers or private foundations that were routed through the financial aid office.¹ A third party paying your tuition through the school shows up here too.²

Student loans are never in Box 5, because they have to be paid back. A $5,000 Pell Grant and a $5,000 subsidized Stafford Loan cover the same tuition bill, but only the grant reduces the expenses that feed your credit.

One detail that catches people out: the Box 5 total is not limited to what the school applied against tuition. A scholarship that paid tuition plus a housing stipend appears in Box 5 at its full amount, even though housing itself is not a qualified education expense.

How Box 5 Reduces the Expenses Behind Your Credit

An education credit is calculated on your net qualified education expenses: total qualified expenses minus the scholarships and grants in Box 5. Qualified expenses are tuition, mandatory enrollment fees, and course-related books and supplies.³

The books rule differs between the two credits. For the AOTC, required books and equipment count whether you bought them from the campus bookstore, an outside store, or online.³ For the LLC, books and supplies count only if the school required you to buy them from the school as a condition of enrollment.⁴

Room, board, insurance, transportation, and personal living costs never qualify under either credit. A quick example: tuition and fees of $10,000, Box 5 of $6,000, net qualified expenses of $4,000. That $4,000 is the number that goes into the credit formula.

What That Means in Actual Dollars

The AOTC equals 100% of the first $2,000 in net qualified expenses plus 25% of the next $2,000, for a maximum of $2,500 per eligible student. You need at least $4,000 left after Box 5 to hit the full credit. Up to 40% of the AOTC, capped at $1,000, is refundable, meaning you can get it back even if your tax bill is already zero.⁵ A large Box 5 can wipe that refundable piece out along with the rest.

The LLC equals 20% of the first $10,000 in net qualified expenses, for a maximum of $2,000 per tax return.⁶ The LLC is entirely nonrefundable. Because it stretches across a wider expense range, a moderate Box 5 hits the LLC less severely than it hits the AOTC, but the ceiling is lower to begin with.

When Box 5 Is Bigger Than Your Qualified Expenses

If Box 5 exceeds total qualified expenses, the excess is generally taxable income to the student.² Tuition and fees of $10,000 against Box 5 of $12,000 puts $2,000 on the student’s return as income. This happens most often when an aid package covers tuition plus a living stipend. It also means no credit is available for that year, because net qualified expenses have already gone to zero.

Reallocating Scholarships to Preserve the Credit

You are not stuck with the way the school applied your scholarship. If the scholarship terms allow it to be spent on living expenses, you can choose to treat part of it as paying for room and board rather than tuition. That portion becomes taxable income to the student, but it stops reducing your credit-eligible expenses.²

The IRS acknowledges the trade directly. Publication 970 says including scholarship money in the student’s gross income so it doesn’t reduce credit-eligible expenses “may increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income.”²

Consider a student with $8,000 in tuition and a $6,000 scholarship whose terms allow use for any educational purpose.

Default: the $6,000 offsets tuition, leaving $2,000 in net qualified expenses. AOTC on $2,000 is $2,000.
Reallocated: treat $4,000 of the scholarship as covering living costs and only $2,000 as covering tuition. Net qualified expenses rise to $6,000, but the AOTC caps at the first $4,000, producing a $2,500 credit. The student reports $4,000 as taxable income. At a 10% rate that’s $400 in extra tax, for a net gain of $500 over the default.

The math works best when the student’s marginal rate is low and the credit gain is meaningful, which is why the strategy is most valuable for AOTC-eligible students. Two conditions must hold: the scholarship’s own terms have to permit use for nonqualified costs like room and board, and the award has to otherwise qualify as tax-free under the general scholarship rules.⁷ A scholarship restricted by its terms to tuition can’t be reallocated this way.

If You’re Also Using a 529 Plan

You can’t use the same dollar of tuition for both an education credit and a tax-free 529 distribution.⁸ Expenses have to be split: enough set aside to support the credit you want (up to $4,000 for the AOTC), with 529 money covering the rest.

Box 5 tightens that split, because scholarships reduce qualified expenses before any allocation happens. If Box 5 leaves you with $3,000 in net qualified expenses, that $3,000 is the ceiling on what you can direct to the AOTC, and 529 funds should go to other qualified costs such as room and board (eligible for the 529, not for the credit). Layering them wrong can trigger tax on the earnings portion of the 529 withdrawal or cost you the credit.

Box 4 and Box 6: Prior-Year Adjustments

Box 4 shows adjustments to qualified expenses the school reported in a prior year, and Box 6 shows adjustments to scholarships reported in a prior year.¹ An amount in either box can mean you have to recapture part of a credit you already claimed.

The recapture is not the adjustment figure itself. You recalculate the prior year’s credit as if the corrected numbers had been used, then report the difference as additional tax on the current year’s return. If the school refunded part of last year’s tuition or applied a scholarship back to a prior semester, look at these boxes before you file.

If Box 5 Looks Wrong

Schools must furnish Form 1098-T by January 31.⁹ If the Box 5 amount doesn’t match what you received, contact the bursar or financial aid office and ask for a corrected form before filing. Common issues are scholarships posted to the wrong calendar year and outside scholarships the school didn’t record correctly.

If the school won’t correct the form, or never issued one, you can still claim the credit using your own records: billing statements, payment receipts, and financial aid award letters. The IRS lets you base the credit on verifiable records even when they differ from the 1098-T, provided you can substantiate every figure.¹⁰ File with the correct numbers, keep the documentation for at least three years, and attach an explanation if the discrepancy is large.

1
Internal Revenue Service. Form 1098-T 2025 Tuition Statement
2
Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education
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Internal Revenue Service. Qualified Education Expenses
4
Internal Revenue Service. Education Credits: American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC)
5
Internal Revenue Service. American Opportunity Tax Credit
6
Internal Revenue Service. Lifetime Learning Credit
7
Internal Revenue Service. The Interaction of Scholarships and Tax Credits
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Internal Revenue Service. 529 Plans: Questions and Answers
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Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2025)
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Internal Revenue Service. About Form 1098-T, Tuition Statement