Does a 1098-T Increase or Decrease Your Tax Refund?

Does a 1098-T increase or decrease your tax refund? On its own, it does neither. Form 1098-T is a reporting document your school files with the IRS and sends to you; the numbers on it feed into two education tax credits, and those credits are what actually move your refund. The American Opportunity Tax Credit can put up to $1,000 back in your pocket even if you owe no tax. The Lifetime Learning Credit can cut what you owe but won’t generate a refund by itself. And in one specific situation — when your scholarships exceed your tuition — the form’s figures can point to taxable income that reduces your refund instead.

What the 1098-T Is Doing

Your school sends the form each year you’re enrolled.¹ Two boxes carry the weight. Box 1 shows payments the school received for qualified tuition and related expenses during the calendar year. Box 5 shows scholarships and grants processed through the school in that same period.²

Nothing on the form is automatically the number you claim. You subtract scholarships and grants from your qualified expenses first, then use the result to calculate a credit on Form 8863.³ Textbooks, required supplies, and course equipment you paid for out of pocket usually aren’t on the 1098-T at all, but they still count.⁴

How the AOTC Puts Cash in Your Refund

The American Opportunity Tax Credit is worth up to $2,500 per eligible student per year: 100% of your first $2,000 in qualified expenses plus 25% of the next $2,000.⁵ To hit the full amount you need at least $4,000 in qualified expenses after scholarships.

What makes the AOTC unusual is that 40% of it is refundable. Say you qualify for the full $2,500 and owe $1,500 in tax. The credit erases that $1,500. Of the remaining $1,000, you get 40% back as a refund, which is $400. If you owe no tax at all, 40% of the full $2,500 comes back as $1,000.⁵ That $1,000 is the ceiling on what the 1098-T can directly add to your refund beyond taxes already paid in.

The AOTC has conditions. It’s only available for the first four years of higher education, and only for four tax years per student. The student must be pursuing a degree or recognized credential and enrolled at least half-time for at least one academic period during the year.⁵ A student with a federal or state felony drug conviction is ineligible.⁶

The Lifetime Learning Credit Reduces Tax, Not to Zero and Below

The Lifetime Learning Credit is worth up to $2,000 per return, calculated as 20% of the first $10,000 in qualified expenses.⁷ It’s non-refundable. It can knock your tax bill down to zero and no lower; if you already owe nothing, it does nothing.

What it lacks in refund power it makes up for in flexibility. There’s no cap on how many years you can claim it, it covers graduate school and professional programs, and it works for individual courses taken to improve job skills. No degree requirement, no half-time requirement. You can only claim one of the two credits per student in a given tax year.⁶

When the 1098-T Can Shrink Your Refund

If Box 5 is larger than Box 1 — scholarships and grants exceeded qualified tuition and fees — the excess may be taxable income. Scholarship money is tax-free only when it covers tuition, required fees, and required books and supplies for a degree-seeking student. Any portion applied to room, board, travel, or other living expenses is taxable and needs to be reported.⁸

A generous package that covers tuition plus housing can look like free money and still add taxable income to your return. Depending on how large that taxable portion is, it can offset the benefit of an education credit or even outweigh it. Look at what the scholarship dollars were actually earmarked for before assuming your refund goes up.

Which Expenses Count

Qualified expenses for both credits include tuition, required enrollment fees, and the books, supplies, and equipment your courses require.⁹ Student activity fees count when the school requires them as a condition of enrollment.

Room and board do not qualify. Neither do insurance, transportation, medical expenses, or student health fees.⁴ Total cost of attendance is not the number to use; only tuition-related costs and required course materials count.

Scholarships and grants reduce qualified expenses dollar for dollar. Wages, personal savings, loans, gifts, and inheritances do not — money you paid from those sources still counts as your out-of-pocket cost.⁹

Who Actually Gets to Claim It

Both credits phase out at the same income levels. You get the full credit with modified adjusted gross income of $80,000 or less, or $160,000 or less filing jointly. The credit shrinks above that and disappears at $90,000 single or $180,000 joint.⁵¹⁰ Married filing separately cannot claim either credit.⁶

Dependency status controls who takes the credit. If someone claims the student as a dependent, only that person can claim the education credit. If the student files independently and no one claims them, the student claims it. Families lose money here regularly: a parent who paid tuition but didn’t claim the student as a dependent can’t take the credit, and the student who didn’t pay the tuition can’t take it either. The dependency claim and the credit claim have to be on the same return.

For students and families with low or moderate incomes, the AOTC is almost always the better pick. A part-time-working student who owes little in federal tax still gets the $1,000 refundable portion.

If the 1098-T Looks Wrong or Never Arrived

Schools prepare the form, and mistakes happen — especially when payments straddle calendar years or scholarships post late. You aren’t stuck with the form’s numbers. You can claim the correct qualified expenses as long as you can substantiate what you actually paid.¹¹ Keep bursar statements, textbook receipts, and scholarship disbursement records.

If no form arrived and you think one should have, contact the school’s financial office after January 31 and request one before you file. In limited situations where a school isn’t required to issue the form, you can still claim the credit, but you’ll need to prove enrollment and out-of-pocket payment independently.¹¹

Mistakes That Cost More Than the Credit

Most disallowed AOTC claims aren’t fraud. They’re claiming expenses that don’t qualify (room and board is the classic), forgetting to reduce expenses by scholarship amounts, or claiming the AOTC for a fifth year after the four-year limit is used up.

The consequences are real. If the IRS disallows your AOTC and finds you were reckless or intentionally disregarded the rules, you’re banned from the credit for two years. A fraud finding extends the ban to ten years.¹² After the ban ends, you have to file Form 8862 to show you’re eligible again before you can claim it.¹³ Clean records and a clear read of what qualifies keep the credit doing what it’s supposed to do: adding to your refund, not eating into it later.

1
Internal Revenue Service. About Form 1098-T, Tuition Statement
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Internal Revenue Service. Instructions for Forms 1098-E and 1098-T
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Internal Revenue Service. About Form 8863
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Internal Revenue Service. Qualified Education Expenses
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Internal Revenue Service. American Opportunity Tax Credit
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Internal Revenue Service. Education Credits – AOTC and LLC
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Internal Revenue Service. Lifetime Learning Credit
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Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
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Internal Revenue Service. Publication 970, Tax Benefits for Education
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Office of the Law Revision Counsel. 26 U.S. Code 25A – American Opportunity and Lifetime Learning Credits
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Internal Revenue Service. Instructions for Form 8863
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Internal Revenue Service. Instructions for Form 8862
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Internal Revenue Service. Understanding Your CP79B Notice