Box 5 on Form 1098-T is the total of scholarships, fellowships, and grants your school processed for you during the calendar year. That single number decides two things at tax time: whether part of your aid counts as taxable income, and how much of your tuition is still “yours” for purposes of an education tax credit. The comparison that matters is Box 5 against Box 1.
What Box 5 Counts
Box 5 captures every scholarship, fellowship, grant, tuition waiver, and similar payment the school received or administered on your behalf during the year. Federal Pell Grants, state aid, institutional merit scholarships, and third-party grants routed through the school all land here. The common thread is that none of them require repayment.
Student loans do not appear in Box 5, not even subsidized federal loans. Work-study wages are excluded too, because they are pay for services and show up on a W-2. If a scholarship required you to teach, do research, or perform other services, that portion is generally treated as wages and reported separately as well.1Internal Revenue Service. Topic No. 421 – Scholarships, Fellowship Grants, and Other Grants
How Box 1 and Box 5 Fit Together
Box 5 doesn’t stand alone. Read it against Box 1, which reports the total payments the school received for qualified tuition and related expenses. Box 1 is not reduced by scholarships or grants; it reflects the full amount paid before aid is netted out.2Internal Revenue Service. Instructions for Forms 1098-E and 1098-T
Subtract Box 5 from Box 1. A positive result means you have net qualified expenses that can support an education credit. A negative result means part of your aid may be taxable. That one calculation drives almost every decision you’ll make with this form.
When Scholarships Become Taxable
Scholarship money is tax-free only to the extent you spend it on qualified tuition and related expenses: tuition, enrollment fees, and books, supplies, and equipment required for your courses. You also have to be a degree candidate at an eligible school.3Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships
Anything spent on room and board, travel, insurance, or other personal living costs falls outside the exclusion and becomes taxable. The same is true if Box 5 simply exceeds your qualified expenses for the year. Say you received $15,000 in grants but paid $12,000 in qualifying tuition and fees. The remaining $3,000 is taxable income you need to report.1Internal Revenue Service. Topic No. 421 – Scholarships, Fellowship Grants, and Other Grants
One quirk: taxable scholarship income is not subject to Social Security or Medicare taxes, because it isn’t compensation. It is subject to federal income tax, and you are the one responsible for tracking how the funds were used.
To report it, if the taxable amount was not on a W-2, put it on Schedule 1 (Form 1040), line 8r, which flows to line 8 of your 1040. If it was on a W-2 because the aid required services, it goes on Form 1040, line 1a.4Internal Revenue Service. Publication 970 – Tax Benefits for Education Your school will not calculate the taxable share for you. The 1098-T is informational, not a final computation, and only you know whether your scholarship dollars went to tuition or to rent.
When Box 5 Leaves Room for a Credit
Before claiming an education credit, you have to reduce your qualified expenses by the tax-free portion of your scholarships and grants. This is the no-double-benefit rule: you cannot exclude scholarship money from income and use the same expenses to generate a credit.5Internal Revenue Service. No Double Education Benefits Allowed
Paid $10,000 in qualified tuition and received $4,000 in tax-free grants? Net qualified expenses for credit purposes are $6,000. If Box 5 matches or exceeds Box 1, that net drops to zero and no credit is available on the face of the form. Two credits are in play, and Box 5 hits them differently.
American Opportunity Tax Credit
The AOTC covers 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 per year. It applies during the first four years of postsecondary education, and 40% of the credit (up to $1,000) is refundable.6Internal Revenue Service. American Opportunity Tax Credit
The AOTC’s definition of qualified expenses is broader than what shows up on the 1098-T. Required books, supplies, and equipment count even if you bought them from an off-campus bookstore.7Internal Revenue Service. Qualified Education Expenses A $300 textbook bought on Amazon for a required course still counts. You get the full credit if your modified adjusted gross income is $80,000 or less ($160,000 for married filing jointly), with a phaseout up to $90,000 ($180,000 joint).6Internal Revenue Service. American Opportunity Tax Credit
Lifetime Learning Credit
The LLC is 20% of up to $10,000 in net qualified expenses, for a maximum of $2,000 per return (not per student). There is no cap on how many years you can claim it, which makes it useful for graduate students and anyone taking courses past the AOTC window.8Internal Revenue Service. Lifetime Learning Credit
The LLC is stricter about materials. Books, supplies, and equipment qualify only if you must pay for them directly through the school as a condition of enrollment.7Internal Revenue Service. Qualified Education Expenses That same $300 outside textbook doesn’t count here. MAGI must be below $90,000 ($180,000 joint) to claim any of it.9Internal Revenue Service. Education Credits – AOTC and LLC
Choosing to Treat Some Scholarship as Taxable
Here is the planning move built into Box 5. You can voluntarily treat part of your scholarship as taxable income to free up qualified expenses for a credit. The IRS explicitly allows this.5Internal Revenue Service. No Double Education Benefits Allowed
Suppose your scholarships and tuition are both $8,000. Net qualified expenses are zero and no credit shows up. Elect to treat $4,000 of the scholarship as taxable, and you now have $4,000 in net qualified expenses, exactly the amount needed to max the AOTC at $2,500. You would owe income tax on the $4,000 you declared taxable, but for a student in the 10% or 12% bracket, the tax cost is $400 to $480. The $2,500 credit more than covers it, and $1,000 of it is refundable.
The strategy works best when the student’s marginal rate is low and the AOTC is available. It usually doesn’t pencil out for the LLC, which is smaller and nonrefundable. Run the numbers both ways before filing.
Dependent Students and the Kiddie Tax
If a student is claimed as a dependent, the parent claims the education credit but the taxable portion of the scholarship stays on the student’s own return. That split alone catches families off guard.
The bigger surprise is the kiddie tax. Taxable scholarship income that isn’t on a W-2 counts as unearned income for kiddie tax purposes. If a dependent student’s total unearned income exceeds $2,700 (the most recently published threshold, which is adjusted for inflation), the excess can be taxed at the parent’s marginal rate rather than the student’s. The kiddie tax applies to dependents under 19, and to full-time students under 24 who don’t earn more than half their own support.10Internal Revenue Service. Topic No. 553 – Tax on a Child’s Investment and Other Unearned Income
This matters most when you’re considering the voluntary-taxable strategy above. Declaring $4,000 of scholarship taxable to capture the AOTC can push a dependent student past the kiddie tax threshold and eat into the benefit. Factor it in before you decide how much to declare.
If Box 5 Looks Wrong, or Box 6 Has a Number
Schools make mistakes. If Box 5 doesn’t match your financial aid records, contact the bursar or financial aid office and ask for a review. Only the school can issue a corrected 1098-T, and it will be marked “Corrected” at the top. If the school refuses to correct it, or never sends a 1098-T at all, you still have to report accurately from your own records. Keep award letters, tuition bills, and payment receipts.
Box 6 is where prior-year adjustments appear: the school reduced a scholarship or grant that it had reported in an earlier year’s Box 5. That usually means aid was returned or retroactively cut after that year closed. If Box 6 has a figure, you may have overstated taxable scholarship income or understated qualified expenses on a past return, and an amended return (Form 1040-X) for the affected year could produce a refund you didn’t know you were owed.
A Note for Nonresident Students
Nonresident alien students generally do not receive a 1098-T for their taxable aid. The taxable portion of the scholarship is subject to federal withholding (30%, reduced to 14% for students on F, J, M, or Q visas, and potentially lower or zero under a tax treaty), and the school reports it on Form 1042-S rather than a 1098-T.11Internal Revenue Service. Withholding Federal Income Tax on Scholarships, Fellowships, and Grants Paid to Nonresident Aliens Nonresident aliens generally cannot claim the AOTC or LLC, so the credit-optimization strategies above do not apply.