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The 1098-T arrives with Box 5 showing $22,000 and Box 1 showing $18,000. That $4,000 difference just became taxable income. The education credit that was supposed to be worth $2,500 is gone. The scholarship didn’t change. The tuition bill didn’t go up. But the tax software is now asking for an explanation.
This happens when grant or scholarship money exceeds qualified tuition and fees paid during the calendar year. The difference gets treated as taxable income, and the education credit shrinks or disappears.
What Box 1 and Box 5 Actually Report
Box 1 reports payments the school received for qualified tuition and required fees during the calendar year. This is not what the family paid—it’s what the institution posted to the student account between January 1 and December 31.
Box 5 reports the total amount of scholarships or grants the school processed during that same calendar year. This includes federal Pell Grants, state aid, institutional scholarships, and outside awards administered through the school.
The form reflects the school’s accounting system, not the family’s payment timeline. If spring semester tuition was billed in December but financial aid didn’t post until January, those amounts land in different tax years.
When Scholarships Create Taxable Income
Scholarships used for tuition and required fees are tax-free. Once they cover housing, meals, or other living costs, that portion becomes taxable income.
Room and board charges are not qualified education expenses under IRS rules. Neither are meal plans, housing deposits, parking fees, health insurance, or textbooks purchased outside the school bookstore.
When Box 5 exceeds Box 1, the difference often represents aid that covered non-qualified expenses. That excess is reportable income on the student’s tax return.
If a student received $22,000 in aid but only had $18,000 in tuition charges, the extra $4,000 likely covered housing or meals. That $4,000 is taxable, even if the student never touched the money directly.
Why the Numbers Don’t Match What Families Paid
The 1098-T operates on posting dates, not billing dates or payment dates. A family who paid fall tuition in August and spring tuition in December might see only fall tuition in Box 1 if the spring payment posted in January.
Financial aid follows the same posting rule. Aid awarded in the fall but disbursed in January of the following year shows up on the next year’s 1098-T.
This creates a mismatch between the family’s perception of what they paid and what the IRS considers reportable for that tax year.
Some families also pay tuition out of pocket, then receive a refund when scholarships disburse late. The school reports the net transaction, not the gross cash flow. If $10,000 was paid and $8,000 was refunded due to a delayed scholarship, Box 1 reflects $2,000, not $10,000.
How This Affects the American Opportunity Credit
The American Opportunity Credit allows up to $2,500 per student based on qualified education expenses. But those expenses must be reduced by tax-free educational assistance.
If Box 1 shows $18,000 in tuition and Box 5 shows $22,000 in scholarships, the qualified expenses available for the credit are zero. The aid covered all tuition and $4,000 beyond it.
In limited situations, IRS rules allow part of a scholarship to be reported as taxable income so that qualified tuition can be used for the credit. This makes sense when the value of the credit exceeds the tax cost of reporting the scholarship as income.
That calculation depends on the student’s tax bracket, the parents’ tax bracket, and who claims the student as a dependent. A student in the 10% bracket paying tax on $4,000 of scholarship income pays $400. A parent losing a $2,500 education credit loses more.
What to Verify Before Filing
Check whether the calendar year timing caused the mismatch. Pull the student account statement and compare posting dates to the 1098-T reporting period.
Confirm whether housing or meal plan charges were included in the aid package. If the scholarship covered room and board, that portion is taxable regardless of Box 1.
Verify whether 529 plan distributions were taken in the same year. Overlapping 529 withdrawals and scholarships can create coordination issues that reduce qualified expenses further.
Confirm who is claiming the student as a dependent. Taxable scholarship income is generally reported on the student’s return, even if the parents claim the student for the education credit.
Check whether the school reported the same academic year across two tax years. A student who started in August 2025 and received aid in January 2026 might see aid split between two 1098-T forms.
Why Schools Report This Way
Schools report what posted to student accounts, not what students or families perceive as payment. The IRS requires institutions to report on a calendar year basis using the school’s financial system records.
If aid disburses after tuition is due, the posting sequence can make it look like aid exceeded charges even when it exactly matched them. The school is following federal reporting rules, not trying to create tax complications.
The 1098-T is an information return. It does not determine tax liability on its own. Families are responsible for calculating qualified expenses, taxable scholarships, and education credits based on IRS rules, not just the numbers in the boxes.
Box 5 higher than Box 1 is not a mistake. It reflects how federal tax law classifies scholarship money.
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Sarah Johnson is an education policy researcher and student-aid specialist who writes clear, practical guides on financial assistance programs, grants, and career opportunities. She focuses on simplifying complex information for parents, students, and families.
