Understanding Tuition Expenses and Form 1098-T for Tax Benefits

Form 1098-T, the Tuition Statement, is an important document for students and their families seeking to claim education tax credits and deductions. Issued by eligible educational institutions, it provides a record of qualified tuition and related expenses paid during the tax year. However, the information on Form 1098-T may not always reflect the full picture of qualified education expenses, and it's crucial to understand how to accurately calculate and report these expenses for tax purposes.

Purpose of Form 1098-T

The IRS requires educational institutions to send Form 1098-T to students by the end of January. This form serves two primary purposes:

Documenting eligibility to claim education tax credits like the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC).
Documenting that the student was enrolled in a college, which is relevant for 529 plan withdrawals.

It's important to note that Form 1098-T isn't filed with your taxes. Instead, you use the information on the form to complete your tax return and should keep it for your records.

What to Do If You Don't Receive Form 1098-T

If you haven't received your 1098-T by early February, contact your school. For a taxpayer to file their return without the form, they must be sure of their eligibility and the amount contained in the form. The preparer must have verified documents showing the expenses that are being claimed, the funds that were received and that reduced the education cost, scholarship and grants.

Qualified Education Expenses Beyond Form 1098-T

One important point about Form 1098-T is that it might only show tuition net of scholarships. Both education tax credits and 529 withdrawals have additional qualified expenses that need to be added to amounts on the 1098-T for tax filing purposes.

For example, the AOTC includes books and supplies, regardless of where they are purchased, among qualified expenses. These need to be added to the family's qualified expenses, and receipts should be kept in the event of an audit. The AOTC is claimed using Form 8863.

Reporting Expenses Not Included on Form 1098-T

In the event that there are expenses that have not been included on Form 1098-T, they may be included in Form 8863 and a Preparer’s Note tagged along in the return addressing the extra expenses. The preparer must be furnished with proof of the expenses.

Unfortunately, many tax prep software programs only ask you to enter amounts from your 1098-T, not all qualified higher education expenses, and will calculate taxes and penalties when you enter 529 withdrawals in excess of the 1098-T amount entered, and tell you you're not eligible for the AOTC due to 529 withdrawals in excess of qualified expenses. In fact, the IRS' instructions for Form 8863 ask you to calculate your Qualified Higher Education Expenses and enter that amount, not the amount shown on your 1098-T, and only asks you to check a box indicating whether or not you received a 1098-T and whether Box 7 was checked on the 1098-T. So regardless of what the software says, enter the full amount of qualified expenses paid in the calendar year, not what's on the 1098-T.

Understanding the Boxes on Form 1098-T

Form 1098-T contains several boxes with specific information about your educational expenses and financial aid. Understanding what each box represents will help you accurately report your expenses and claim the correct education tax credits.

Box 1: Enter the total amount of payments received for qualified tuition and related expenses from all sources during the calendar year. The amount reported is the total amount of payments received less any reimbursements or refunds made during the calendar year that relate to the payments received for qualified tuition and related expenses during the same calendar year. The amount reported is not reduced by scholarships and grants reported in box 5.
Box 2: This box is not currently used. Previously, schools reported the amounts they’ve billed for eligible tuition and related education expenses in Box 2.
Box 3: This box is not currently used.
Box 4: If your school issued a refund or there was an error in the previous year’s tuition reporting, your school will report the adjustments in Box 4. This box reports adjustments made to qualified tuition and related expenses reported on a prior year Form 1098-T in Box 1. The amount reported in Box 4 represents a reduction in tuition paid during a prior calendar year.
Box 5: Enter the total amount of any scholarships or grants that you administered and processed during the calendar year for the payment of the student’s costs of attendance. Scholarships and grants generally include all payments received from third parties (excluding family members and loan proceeds).
Box 6: If you received additional scholarships or grants or had some taken back, you can find these adjustments in Box 6. This box reports adjustments made to scholarships or grants reported on a prior year Form 1098-T in Box 5. The amount reported in Box 6 represents a reduction in scholarships or grants reported for a prior calendar year.
Box 7: If you’ve made payments for the first three months of the next year, your school will check Box 7. Schools must check Box 7 if the amount in Box 1 or 2 includes expenses for an academic term that begins in the first three months of the year following the year covered by the 1098-T.
Box 8: Check this box if the student was at least a half-time student during any academic period that began in 2025. This box shows whether you are considered to be carrying at least one-half the normal full-time workload for your course of study at ASU for at least one academic period during the calendar year.
Box 9: If you were a graduate student during the academic period, your school will check Box 9. This box helps you determine which credits you can claim.
Box 10: If you’ve been reimbursed or refunded because you had to withdraw due to a family emergency or medical reasons, your school will list the total amount in Box 10.

Education Tax Credits: AOTC and LLC

The information from Form 1098-T is used to claim education tax credits, primarily the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Either the parent or the eligible student can claim an education credit for the student’s education expenses, but not both. If someone other than a parent or their dependent, such as a relative, pays education expenses, the student is treated as if they are paying these expenses.

Read also: Affording ECU

American Opportunity Tax Credit (AOTC): The AOTC is for students in their first four years of higher education. It allows you to claim up to $2,500 per eligible student. The AOTC includes books and supplies, regardless of where they are purchased, among qualified expenses. These need to be added to the family's qualified expenses, and receipts should be kept in the event of an audit. The AOTC is claimed using Form 8863.
Lifetime Learning Credit (LLC): The LLC is for any postsecondary education and does not have a limit on the number of years you can claim it. The LLC allows you to claim up to $2,000 per tax return (not per student) but is not refundable. To take advantage of these credits, you need the information from your 1098-T form.

Reporting Scholarship and Grant Amounts

Box 5 of Form 1098-T reports the total amount of scholarships or grants you received during the tax year. These amounts can reduce the amount of qualified expenses you can claim for tax credits.

If the amount in Box 5 (your scholarships) is GREATER THAN the amount in Box 1 (or Box 2, whichever is filled in on your 1098-T), then you cannot use any expenses to reduce your tax bill. The amount in box 5 is LESS THAN the amount in Box 1 (or Box 2, whichever is filled in on your 1098-T), then you can use the expenses as a deduction or credit. Subtract Box 5 from Box 1 (or Box 2). The difference is generally the amount that was paid out of pocket and that can be reported on your return.

If your scholarships, fellowships, and/or grants are more than the qualified education expenses, this is considered income - which needs to be reported on the student's tax return. The TaxAct program will automatically calculate the amount of taxable scholarships. Individual Income Tax Return. Conversely, if the scholarship income calculated belongs to the dependent/student, this income will need to be reported on their return. Taxable scholarship income will be included on Form 1040, Line 1.

Form 1099-Q and 529 Plan Distributions

It's common to receive both Form 1098-T and Form 1099-Q (statement for distributions from your 529 plan). Form 1099-Q only shows the total distribution amount and the amount of basis (your contributions) and the amount of earnings (how much the account grew). Amounts on Form 1099-Q only need to be reported if the distributions were non-qualified, which means they were spent on something other than tuition, fees, room and board and required expenses. That means that most people do not need to report their 529 distributions on their tax return.

Nonqualified distributions are reported on the tax return of the person who received the 1099-Q. The earnings portion of the nonqualified distribution is taxable at that person's marginal tax rate plus the 10% penalty. Distributions that go directly to the school or to the student will have the student's SSN and thus be reported on the student's return if nonqualified; distributions going to the parent (or other account owner) will have that person's SSN and therefore be reported on their tax return if nonqualified.

Read also: Withdrawals for College: A Guide

Importance of Accurate Reporting

Accurately reporting qualified education expenses is crucial for maximizing tax benefits and avoiding potential issues with the IRS. Keep detailed records of all expenses, including tuition, fees, books, and supplies. If you're unsure about how to report certain expenses or claim education tax credits, consult with a qualified tax professional.

Filing Form 1098-T Electronically

The Taxpayer First Act of 2019 authorized the Department of the Treasury and the IRS to issue regulations that reduce the 250-return e-file threshold. T.D. 9972, published February 23, 2023, lowered the e-file threshold to 10 (calculated by aggregating all information returns), effective for information returns required to be filed on or after January 1, 2024. The IRS has developed IRIS, an online portal that allows taxpayers to e-file information returns after December 31, 2022, for 2022 and later tax years. In addition to these specific instructions, you should also use the current General Instructions for Certain Information Returns.

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