When your 1098-T shows scholarships exceeding tuition, the difference is taxable income that you have to report yourself, because the IRS only lets scholarship money stay tax-free to the extent it paid for tuition, required fees, and required course materials. Everything above that number — the part that ended up covering housing, meals, travel, or a refund to your bank account — is treated as income even though nothing was withheld from it.
Box 5 on your 1098-T reports the total scholarships and grants the school administered. Box 1 reports payments received for qualified tuition and related expenses. When Box 5 is larger than Box 1, the form is telling you there’s a taxable excess. The exact taxable amount, though, usually isn’t what the form shows on its face.
Why the Two Boxes Rarely Tell the Full Story
Box 1 may not capture every qualified expense you actually paid. Required textbooks and course materials you bought from an off-campus retailer count as qualified expenses, but they won’t appear in Box 1. Box 5, on the other hand, may leave out private scholarships that were paid directly to you and never routed through the school.
To calculate what you actually owe tax on, you need your own records: billing statements, receipts for required books and supplies, and documentation of every scholarship or grant, whether it hit the 1098-T or not.
One historical note: Box 2 on the current 1098-T is blank and marked “Reserved.” Older guidance that tells you to compare Box 1 against Box 2 is outdated and can be ignored.
What Counts as a Qualified Education Expense
The list is narrow. Qualified expenses are tuition, enrollment fees, and course-related books, supplies, and equipment that the school requires for attendance or for a specific course of study. A mandatory lab fee qualifies. A required textbook qualifies.
Everything else is out. Room and board don’t qualify, even when you pay them straight to campus housing. Student health insurance, personal travel, parking, gym memberships, and optional activity fees are excluded. A computer only qualifies if the school explicitly requires you to own one as a condition of enrollment.
Room and board is where most students get caught. A “full ride” that covers tuition, fees, and a meal plan is not entirely tax-free — the meal plan and housing portions funded by the scholarship are taxable.
Calculating the Taxable Amount
Add up every scholarship, fellowship, and grant you received during the calendar year. Subtract the qualified education expenses you actually paid. What’s left is taxable.
Say you received $20,000 in scholarships and paid $14,000 in qualifying tuition and fees. The $6,000 gap is taxable, no matter where the money physically went — housing, a refund check, a plane ticket home. Pell grants, merit scholarships, and Fulbright grants all get lumped together in this calculation.
One coordination rule to watch: if a 529 plan distribution also paid for tuition, you can’t use the same tuition dollars to justify a tax-free scholarship. If a 529 covered $5,000 of your $14,000 tuition, only $9,000 remains available to offset your scholarship, and the taxable excess grows accordingly.
Where to Report the Taxable Portion
The reporting line depends on whether the taxable amount showed up on a W-2. Graduate teaching or research assistantships sometimes bundle a scholarship component into W-2 wages; in that case, the amount is already on Line 1a of Form 1040 with the rest of your wages.
If the taxable amount was not on a W-2 — the common case for undergraduates — report it on Schedule 1 (Form 1040), Line 8r. That figure flows to Line 8 of your Form 1040. Older advice about writing “SCH” next to Line 1 is no longer correct.
No school withholds tax from a scholarship the way an employer withholds from a paycheck. You get the full amount and settle up at filing time. That surprise is a big part of why students end up owing money in April.
Do You Have to File a Return at All
A student claimed as a dependent still has to file their own return once their gross income clears the dependent threshold. Parents cannot fold a student’s scholarship income into the parents’ return — the income belongs to the person who received the scholarship.
For the 2026 tax year, the standard deduction for a dependent is the greater of $1,350 or the dependent’s earned income plus $450, capped at the $16,100 basic single-filer standard deduction. If taxable scholarship income is your only income and it exceeds $1,350, you need to file.
There’s a helpful quirk here. For the standard deduction calculation, the IRS treats taxable scholarship income as earned income. A student with $5,000 of taxable scholarship and no other income gets a $5,450 standard deduction ($5,000 + $450), which zeroes out the tax on that scholarship.
The Kiddie Tax Trap
The same taxable scholarship that counts as earned income for the standard deduction flips to unearned income for the kiddie tax on Form 8615. That’s the counterintuitive rule that catches families off guard.
For 2026, the kiddie tax works in three layers:
- The first $1,350 is covered by the standard deduction and isn’t taxed.
- The next $1,350 is taxed at the student’s own rate, typically 10%.
- Anything above $2,700 is taxed at the parent’s marginal rate.
A dependent with $8,000 of taxable scholarship and no other income shelters the first $1,350, pays 10% ($135) on the next $1,350, and pays the parent’s top rate on the remaining $5,300. If the parents are in the 24% bracket, that last slice generates $1,272 in tax — a lot more than the $530 the student would owe at their own 10% rate.
The kiddie tax applies to children under 19, or under 24 if they’re full-time students not providing more than half of their own support. If your taxable scholarship exceeds $2,700, Form 8615 has to be attached.
Using the Excess to Claim the American Opportunity Credit
Here’s the counterintuitive planning move: sometimes it pays to voluntarily make more of your scholarship taxable. The American Opportunity Tax Credit is worth up to $2,500 per eligible student for the first four years of college, and 40% of it (up to $1,000) is refundable. But the credit only counts tuition and required expenses that you paid out of pocket — expenses already covered by a tax-free scholarship don’t count.
The IRS lets you choose whether scholarship funds are treated as paying for qualified expenses (tax-free) or as paying for living costs (taxable). By pushing some of the scholarship into the taxable bucket, you free up tuition dollars to claim the credit.
Consider a student with a $12,000 scholarship and $10,000 in tuition. The default treatment leaves $10,000 tax-free, $2,000 taxable, and zero tuition available for the AOTC. Reassign $6,000 of the scholarship to living expenses and the picture changes: $6,000 becomes taxable, $4,000 of tuition frees up, and that $4,000 generates a full $2,500 AOTC (100% of the first $2,000 plus 25% of the next $2,000). The extra $4,000 of taxable income might cost $400 to $600 in tax for a student in a low bracket. Net benefit: roughly $1,900 to $2,100.
When the Strategy Backfires
The math flips against you if the student is subject to the kiddie tax at a parent’s high marginal rate, if family income is over the AOTC phase-out (which begins at $80,000 for single filers and $160,000 for joint filers, ending at $90,000 and $180,000), or if the AOTC has already been claimed for four years. Run both scenarios before committing.
Watch Out for an Underpayment Penalty
Because nothing was withheld, a large taxable scholarship can trigger an underpayment penalty. The IRS expects tax to be paid throughout the year, not in a single April payment. If the taxable portion is substantial, you may need to make quarterly estimated payments with Form 1040-ES.
You avoid the penalty by meeting one of two safe harbors: pay at least 90% of the current year’s tax through withholding and estimates, or pay at least 100% of the prior year’s tax. First-time filers with no prior liability satisfy the second one automatically, but students who had taxable scholarship income last year should plan ahead.
If you also work a part-time job, an easier fix is to increase federal withholding on your W-4. The IRS doesn’t distinguish between withholding sources — it just wants to see enough total by year-end.
A Note for International Students
The rules above are for U.S. students. Nonresident alien students face a default 30% withholding on the taxable portion of a scholarship, usually deducted before any refund is disbursed. Many tax treaties reduce or eliminate that withholding; claiming a treaty benefit requires filing Form W-8BEN with the school before disbursement, and possibly Form 8833 with the return. International students report taxable scholarship income on Schedule 1, Line 8r of Form 1040-NR, and any amounts already withheld appear on Form 1042-S instead of a W-2.