What the 1098-T does to your tax bill

The 1098-T is a form your school sends you when you pay may have access to education expenses — tuition, fees, books, supplies, and equipment required for enrollment. It reduces the federal income tax you owe by letting you claim education credits, which work differently than deductions. A credit directly lowers your tax bill dollar for dollar, while a deduction only lowers the income you report as taxable.

The 1098-T reports two possible credits: the American Opportunity Tax Credit (up to $2,500 per student per year) and the Lifetime Learning Credit (up to $2,000 per return per year). You can claim only one credit per student per tax year, and you must have paid the expenses yourself or claimed the student as a dependent. The form shows what the school reported to the IRS, but you decide which credit to use when you file.

Not every dollar on the 1098-T reduces your taxes. The credits phase out at higher income levels, and you cannot claim a credit for expenses you paid with tax-information programs like scholarships, grants, or employer tuition information. If your 1098-T shows expenses that were covered by those sources, you must subtract them before calculating your credit.

Key Takeaways

  • The 1098-T reports education expenses your school received from you, and you use it to claim a federal tax credit that reduces what you owe.
  • You can claim either the American Opportunity Credit (up to $2,500) or the Lifetime Learning Credit (up to $2,000) per student per year, but not both.
  • If you paid expenses with scholarships, grants, or employer information, you must subtract those amounts from the 1098-T before claiming your credit.
  • The credits phase out at certain income levels, so your income determines whether you can use the full credit amount or none at all.
  • You report the credit on your tax return even if you did not receive a 1098-T, as long as you have proof of the expenses you paid.

Which credit you can claim and how much it reduces your taxes

The American Opportunity Tax Credit is worth up to $2,500 per student per year and covers four years of undergraduate study. It requires the student to be enrolled at least half-time and have no felony drug convictions. You can claim it for multiple students in the same year if you have more than one in school. The credit is partially refundable, meaning if the credit exceeds your tax bill, you may receive up to $1,000 as a refund.

The Lifetime Learning Credit is worth up to $2,000 per tax return (not per student) and covers any level of education — undergraduate, graduate, or professional development courses. There is no enrollment requirement, and you can claim it for an unlimited number of years. However, it is not refundable, so it can only reduce your tax bill to zero; you will not receive money back if the credit is larger than what you owe.

Your income determines whether you can claim the full credit, a reduced amount, or no credit at all. For 2023, the American Opportunity Credit begins to phase out at $80,000 of modified adjusted gross income for single filers and $160,000 for married filing jointly. The Lifetime Learning Credit phases out at $80,000 for single filers and $160,000 for married filing jointly. These income limits change each year. If your income falls in the phase-out range, you calculate a reduced credit using IRS worksheets or tax software.

What expenses count and what the 1098-T actually reports

The 1098-T reports only expenses the school received directly from you or your dependent. This includes tuition, required fees, books, supplies, and equipment that the school requires for enrollment. It does not include room and board, transportation, insurance, or personal expenses, even if you paid them while your student was in school.

Box 1 on the 1098-T shows may have access to tuition and related education expenses the school received. Box 2 shows scholarships or grants the school paid on your behalf. Box 5 shows expenses for a student who was not enrolled at least half-time. When you calculate your credit, you subtract Box 2 from Box 1 to find the amount you actually paid out of pocket.

If you paid expenses directly to the school but the school did not report them on the 1098-T, you can still claim the credit. Keep receipts, invoices, and proof of payment. If the school made an error on the form, contact the school's financial aid office and ask them to issue a corrected 1098-T. Do not file your return until the correction arrives, because the IRS will match your return against the school's report.

How scholarships and grants change what you can claim

If your student received a scholarship or grant, the school reports it in Box 2 of the 1098-T. You must subtract this amount from the may have access to expenses in Box 1 before you calculate your credit. This prevents you from claiming a credit for money you did not actually pay.

The rule applies even if the scholarship or grant was restricted to a specific expense like books or fees. If the school applied the money to any may have access to education expense, you must reduce your credit calculation by that amount. For example, if Box 1 shows $8,000 in expenses and Box 2 shows $3,000 in scholarships, you can only claim a credit based on $5,000 of expenses.

Employer tuition information follows the same rule. If your employer paid part of your tuition directly to the school, the school should report it in Box 2. If your employer reimbursed you directly, you must still subtract it from the expenses you claim. Keep the reimbursement documentation so you can prove the amount if the IRS questions your return.

Where to report the 1098-T on your tax return

You report education credits on Form 8863, which is titled "Education Credits." This form calculates which credit you are may have access to to claim based on your income and the expenses you paid. You then transfer the credit amount to your main tax return (Form 1040) on the line for education credits.

Tax software walks you through Form 8863 by asking questions about your income, the student's enrollment status, and the expenses you paid. If you are filing by hand, you will need to complete the worksheets in the Form 8863 instructions to determine your credit amount. The IRS website and your school's financial aid office both have worksheets and examples.

You must file Form 8863 even if the 1098-T shows a credit amount. The form ensures you are not claiming a credit you are not may have access to to based on your income or the source of the funds used to pay the expenses. If you claim a credit you do not may have access to for, the IRS will disallow it and you may owe penalties and interest.

What happens if the 1098-T shows an error or you did not receive one

Schools must send the 1098-T by January 31 each year. If you do not receive one by early February, contact your school's financial aid or bursar office. Ask them to check whether they have your correct mailing address and to resend the form or provide a duplicate.

If the form contains an error — wrong student name, wrong expenses, wrong scholarship amount — ask the school to issue a corrected form. The school will send a corrected 1098-T to you and file a corrected version with the IRS. Wait for the corrected form before you file your return. If you file before the correction arrives and the IRS later receives a different form from the school, you may receive a notice asking you to explain the difference.

If you paid may have access to education expenses but the school did not issue a 1098-T, you can still claim the credit. Gather your receipts, invoices, cancelled checks, credit card statements, or any other proof that you paid the expenses. You will need to calculate the credit yourself using Form 8863, and you should keep the documentation with your tax records in case the IRS asks for proof.

Income limits and how they affect your credit

Both education credits phase out at higher income levels. Your modified adjusted gross income (MAGI) determines whether you can claim the full credit, a partial credit, or no credit at all. For most people, MAGI is the same as adjusted gross income shown on your tax return, but certain types of income can change it.

For 2023, the American Opportunity Credit phases out between $80,000 and $90,000 for single filers and between $160,000 and $180,000 for married filing jointly. The Lifetime Learning Credit phases out between $80,000 and $90,000 for single filers and between $160,000 and $180,000 for married filing jointly. These ranges increase slightly each year for inflation. If your income falls within the phase-out range, you must use a worksheet to calculate a reduced credit.

If your income exceeds the upper limit of the phase-out range, you cannot claim either credit. In that case, the 1098-T does not reduce your taxes at all. Some families in this situation look into whether a dependent student can claim the credit on their own return if they have income and file separately, though this is rarely beneficial. A tax professional can review your specific situation.

Frequently Asked Questions

Can I claim the education credit if I paid expenses with a student loan?

Yes. Student loans are not scholarships or grants, so you do not subtract them from the expenses you claim. However, you can only claim a credit for expenses you actually paid out of pocket — the loan proceeds themselves do not count as payment. If you borrowed money and used it to pay tuition, you can claim the credit for that tuition.

What if my student attended school for only part of the year?

You can still claim the credit if the student was enrolled at least half-time for at least one academic period during the year. The 1098-T will show the expenses for the periods the student was enrolled. If the student dropped out or took a leave of absence, the school may report only the expenses for the time the student was actually enrolled.

Can I claim the credit for my adult child if they do not live with me?

Only if you claim them as a dependent on your tax return. If your adult child files their own return and you do not claim them as a dependent, they must claim the credit themselves. You cannot claim the credit for someone else's education expenses unless you are legally responsible for them.

Do I have to use the 1098-T amount, or can I claim a different amount?

You can claim a different amount if the 1098-T is incorrect or incomplete. If you paid expenses the school did not report, you can add them to the form's amount. If you paid expenses with scholarships or grants that the school did not report in Box 2, you must subtract them yourself. Keep documentation of all expenses and payments.

What if I paid expenses in one year but the 1098-T arrived in the next year?

You claim the credit in the year you paid the expenses, not the year you received the form. If you paid tuition in December 2023 but the 1098-T arrived in January 2024, you claim the credit on your 2023 tax return. The form is just documentation; the payment date determines which year's return to use.