In most cases, a 1098-T does not lower your tax refund. It usually raises it, because the tuition and fees reported on the form unlock education tax credits worth up to $2,500 per student. There is one situation where a 1098-T can shrink your refund or push you into owing: when the scholarships and grants in Box 5 are larger than the qualified tuition and fees in Box 1. That gap is generally taxable income, and it gets added to your return whether you were expecting it or not.
When a 1098-T Actually Shrinks Your Refund
The number to watch is the difference between Box 5 (scholarships and grants the school processed) and Box 1 (payments received for qualified tuition and related expenses).1Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2026) Scholarship money spent on tuition, required fees, books, and required supplies is tax-free. Anything left over that paid for room and board, travel, or other living costs is generally taxable to the student.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
Say you received a $20,000 scholarship and your qualified tuition and fees came to $14,000. The remaining $6,000 that covered housing and meals is taxable. That amount gets added to your gross income, which is why students often watch their expected refund drop the moment they enter a 1098-T into tax software.
Payments tied to teaching or research services required as a condition of the award are also taxable, even when they’re labeled as a scholarship. The narrow exceptions are amounts received through the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
There’s a second squeeze here. Scholarships that cover tuition also use up the qualified expenses that would otherwise generate a credit. If aid paid your entire bill, there may be nothing left over to claim, so you lose the credit and still owe tax on the excess. That combination is what turns a 1098-T from a refund booster into a refund cutter.
How the Form Usually Increases Your Refund
When tuition exceeds scholarships, the 1098-T is a good thing. The data feeds Form 8863, where you calculate one of two federal education credits.3Internal Revenue Service. Instructions for Form 8863 (2025) Only one credit per student per year is allowed.
The American Opportunity Tax Credit is worth up to $2,500 per eligible undergraduate, calculated as 100% of the first $2,000 in qualified expenses plus 25% of the next $2,000. Up to 40% of the AOTC is refundable, meaning the IRS will send back up to $1,000 as cash even if you owed no tax to begin with.4Internal Revenue Service. American Opportunity Tax Credit That refundable piece is where students with small paychecks see refunds far larger than their withholding would suggest.
The Lifetime Learning Credit is 20% of up to $10,000 in qualified expenses, capped at $2,000 per return. It has no half-time enrollment requirement and no cap on how many years you can use it, but it is entirely non-refundable. It can wipe your tax bill down to zero; it cannot generate a refund on its own.5Internal Revenue Service. Lifetime Learning Credit – LLC
Because a credit reduces tax dollar-for-dollar, any withholding that would have covered the tax it eliminates comes back to you as a refund. Claim a $2,500 AOTC against a $2,500 tax liability that was already covered by paycheck withholding, and that $2,500 of withholding becomes overpayment the IRS sends back.
Reading Your 1098-T to Predict the Outcome
Before you enter anything into tax software, do the subtraction yourself.
- If Box 1 is larger than Box 5, you have leftover qualified expenses. You’ll likely see a credit and a bigger refund.
- If Box 5 is larger than Box 1, the difference is potentially taxable, and you should expect the refund to move the other way unless that excess was actually spent on qualified expenses like required books.
- If the two are close, the credit may be small and the refund impact modest either way.
The 1098-T often understates what you spent. It captures tuition and mandatory fees paid to the school but misses textbooks and required supplies bought from a third-party retailer. Those additional costs can be added to your qualified expenses when you calculate the AOTC, which sometimes turns a break-even 1098-T into a credit-generating one. Keep your receipts. The form alone won’t back you up if the IRS asks.3Internal Revenue Service. Instructions for Form 8863 (2025)
One boundary worth naming: for the LLC, books and supplies count only if you were required to pay the school directly for them. A textbook bought online counts toward the AOTC but not the LLC.6Internal Revenue Service. Education Credits – AOTC and LLC Room and board, health insurance, transportation, and personal expenses never qualify for either credit.7Internal Revenue Service. Qualified Education Expenses
Reasons the Credit Might Not Land at All
A 1098-T can also fail to boost your refund because you don’t qualify for the credit in the first place. A few common reasons:
Income too high. Both credits phase out between $80,000 and $90,000 of modified adjusted gross income for single filers, and between $160,000 and $180,000 for joint filers. Above the ceiling, the credit is gone.8Office of the Law Revision Counsel. 26 US Code 25A – American Opportunity and Lifetime Learning Credits
Married filing separately. Neither credit is available on a separate return. If a couple wants the credit, they need to file jointly.8Office of the Law Revision Counsel. 26 US Code 25A – American Opportunity and Lifetime Learning Credits
Claimed as a dependent. A student claimed on someone else’s return cannot claim the credit personally. The person who claims the student is the one entitled to file Form 8863, even if the student paid the tuition out of their own pocket.6Internal Revenue Service. Education Credits – AOTC and LLC Families sometimes lose the credit because the parent assumes the student is taking it and the student assumes the parent is. Talk it through before either return is filed.
529 plan overlap. You can claim a credit and take a tax-free 529 distribution in the same year, but the expenses used for the credit have to be different from the expenses covered by the distribution.9Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education If a 529 withdrawal already covered your entire tuition bill, there may be no qualified expenses left for the credit.
What to Check Before You File
Compare Box 5 to Box 1 first and decide which side of the line you’re on. If Box 5 wins, be ready to report the taxable portion of your scholarship as income, and confirm how much of that aid actually paid for tuition and required materials rather than living costs. If Box 1 wins, gather receipts for books, required software, and supplies bought outside the school so you can add them to your qualified expenses.
If any number on the form looks wrong, contact the bursar or financial aid office before you file. Mistakes in Box 1 or Box 5 do happen, and filing with bad data invites an IRS notice later. A corrected 1098-T is easier to request than an amended return is to file.