Is the 1098-T Taxable? Scholarships, Qualified Expenses, and Reporting

The 1098-T is not taxable on its own. It’s an informational statement your school sends you and the IRS reporting tuition payments and scholarships, and receiving one doesn’t create a tax bill. What can be taxable is the scholarship and grant money shown in Box 5 — but only the portion that exceeds your qualified education expenses. If Box 5 is smaller than what you spent on tuition, required fees, and required course materials, none of it is taxable. If Box 5 is larger, the difference is income you have to report.

When Scholarships on the 1098-T Become Taxable

A scholarship or grant is tax-free only to the extent it pays for qualified education expenses: tuition, required fees, and course materials needed for enrollment. The moment scholarship dollars exceed those expenses, the excess becomes taxable income to the student. This is true whether the money went into your bank account or was applied directly to your school account.¹

The math is straightforward. Take the amount in Box 5, subtract your total qualified education expenses, and if there’s anything left over, that leftover is taxable. Report it on Schedule 1, line 8r of Form 1040.²

One eligibility point catches people off guard: to exclude any scholarship from income at all, you generally need to be pursuing a degree at an accredited institution. A grant for a non-degree workshop or professional seminar is usually fully taxable regardless of what it pays for.

What Counts as a Qualified Education Expense

Because qualified expenses determine how much of your scholarship stays tax-free, knowing exactly what qualifies matters. The IRS defines them as tuition, fees, and course materials required for enrollment or attendance at an eligible institution.³

Tuition and mandatory enrollment fees always qualify.
Activity, technology, or lab fees qualify when they are required as a condition of enrollment.
Books, supplies, and equipment qualify when they’re required for your courses.
Room and board, health insurance, transportation, and optional fees never qualify. Scholarship money spent on these is taxable.

The distinction between “required by the institution” and “helpful for school” is what matters. A graphing calculator your syllabus says you must own is qualified. A new desk for your apartment isn’t, even if you study at it every night. When in doubt, check whether the school or the course syllabus mandates the purchase.

Box 1 on your 1098-T almost certainly understates what you actually spent, because your school only reports amounts paid to it. It knows nothing about textbooks, lab supplies, or equipment you bought elsewhere.⁴ Add those separately purchased required items to your qualified expense total. Keep the receipts.

How to Report Taxable Scholarship Income

Most taxable scholarship money goes on Schedule 1, line 8r of Form 1040.² If your school reported the taxable portion on a W-2 instead — less common, but it happens with some teaching or research fellowships — it goes on line 1a of the 1040.¹

No one withholds tax on scholarship income, so a large excess can produce an unexpected bill in April. If you expect to owe more than $1,000 when you file, quarterly estimated payments during the year help you avoid an underpayment penalty. Students with modest taxable scholarship amounts and no other income often fall below the filing threshold and owe nothing, though filing anyway can still be worthwhile if you’re eligible for the refundable portion of the American Opportunity Tax Credit.

A boundary worth knowing: for dependent students under 19 (or under 24 if full-time students), unearned income above $2,700 can trigger the kiddie tax on Form 8615.⁵ Taxable scholarship income for a degree-seeking student is generally treated as earned income for standard deduction purposes, so the kiddie tax typically doesn’t apply to it. Students with meaningful investment income alongside taxable scholarships should still check whether their unearned income crosses that threshold on its own.

Who Reports the Scholarship When the Student Is a Dependent

The taxable scholarship always belongs to the student, even if the student is claimed as a dependent on someone else’s return. If a 20-year-old dependent has $3,000 in excess scholarship income, that $3,000 goes on the student’s own tax return, not the parent’s.

Education credits work the opposite way. A student who’s claimed as a dependent cannot claim an education credit; only the person who claims the dependent can.⁶ So the parent files Form 8863 and receives any credit, even if the student paid tuition from their own bank account, while the student files their own return to report the taxable portion of the scholarship. Splitting this the wrong way is an easy path to an IRS notice.

Choosing to Make a Scholarship Taxable on Purpose

Here’s the counterintuitive part. You aren’t required to treat your scholarship as paying tuition first. The IRS lets you choose whether to apply scholarship dollars to tuition (tax-free, but reducing the expenses available for education credits) or to living expenses like room and board (taxable, but preserving your tuition for the credit).⁷

Why would anyone volunteer to pay tax? Because the American Opportunity Tax Credit can be worth up to $2,500, and reaching the maximum requires at least $4,000 in unreimbursed qualified expenses. If your scholarships cover all your tuition, you have zero qualified expenses left for the credit unless you reclassify some scholarship money as taxable. A student in a low bracket might owe a small amount of tax on the reclassified portion and gain a $1,000 refundable credit in return.⁷

There’s no special form for this election. You make the choice by how you fill out the return: report the portion you’re treating as taxable on Schedule 1, then use the remaining qualified expenses to calculate the credit on Form 8863. Running the numbers both ways before filing is worth the time.

Reconciling the 1098-T With Your Own Records

The figures on the 1098-T are a starting point, not the final word. The IRS explicitly acknowledges that Box 1 may not match what you actually paid, and instructs you to use your own records when completing Form 8863.⁴ Timing differences are the most common cause: a payment made in December for a January semester may land in a different tax year on the school’s books than on yours.

Pull your bursar statements, bank records, and receipts for any education purchases. Compare them against Box 1. Add any required books and supplies you paid for out of pocket. If Box 5 includes a scholarship that was later returned or reduced, check that the adjustment appears in Box 6. Schools make reporting errors, and the IRS holds you, not the school, responsible for what ends up on your return.

1
Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
2
Internal Revenue Service. Instructions for Form 1040 (2025) – Section: Schedule 1 Line 8r
3
Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2025) – Section: Qualified Tuition and Related Expenses
4
Internal Revenue Service. Instructions for Form 8863 (2025) – Section: Form 1098-T Requirement
5
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
6
Internal Revenue Service. Education Credits: American Opportunity Tax Credit and Lifetime Learning Credit
7
Internal Revenue Service. The Interaction of Scholarships and Tax Credits