Do You Pay Taxes on Scholarships? Only the Part Above Tuition.

A parent of a college sophomore opens the Form 1098-T in late January, finds $68,000 in box 5 and $48,000 in box 1, and calls the bursar to report the error. There isn't one. The gap is the part of the scholarship that paid for a dorm room and a meal plan. Do you pay taxes on scholarships? Only on the part that bought something other than tuition.

Tuition is tax free. The dorm is not. Section 117(a) excludes a qualified scholarship from income, and §117(b)(2) defines the expenses that make it qualified: tuition and fees required for enrollment or attendance, plus fees, books, supplies, and equipment required for courses of instruction. That is the entire list. Room, board, travel, health insurance, and a laptop the syllabus never required all sit outside it.

Two other conditions apply. The student has to be a degree candidate at an eligible institution. And the terms of the award control, not the student's checkbook: a grant whose letter earmarks it for housing is taxable even if the money goes to the registrar, because §117(a) reaches only amounts used for qualified expenses in accordance with the conditions of the grant.

Box 1 reports payments the school received for qualified tuition and related expenses. Box 5 reports scholarships and grants the school administered. The Form 1098-T instructions confirm that box 1 is not reduced by box 5, so subtracting one from the other gets you close. Close is not the number.

Box 1 leaves out required books and supplies bought anywhere other than the school, and those count in the student's favor. Box 5 includes grants restricted to housing, which are taxable regardless. Outside scholarships paid straight to the student never appear on the form at all, and no other form reports them either. Worksheet 1-1 in Publication 970 is the computation the IRS actually wants.

A dependent's standard deduction under IRC §63(c)(5) is the greater of $1,350 or earned income plus $450 for 2026, capped at the $16,100 single amount set by Rev. Proc. 2025-32. Taxable scholarship counts as earned income for that limit, and for the dependent filing requirement, under Prop. Reg. §1.117-6(h). Those regulations were proposed in 1988 and never finalized, which is worth knowing, though the IRS applies the rule and Publication 501 states it plainly.

For the kiddie tax the classification flips. Form 8615 treats taxable scholarship not reported on a Form W-2 as unearned income. Once a student who has to file a return has more than $2,700 of unearned income in 2026, the income left after the standard deduction is taxed at the parents' marginal rate under §1(g) instead of the student's 10%.

The exit most families reach for isn't there. The kiddie tax catches a full-time student aged 19 through 23 whose earned income is less than half of their own support, and IRC §152(f)(5) says scholarships are not taken into account in measuring that support. A student on a large award has almost no earned income by that yardstick, which puts them inside the net rather than outside it.

Keep the size of this in view. The kiddie tax changes the rate on a small base, not the whole award: in the case above it costs $350 more than the student's own bracket would have. It is worth getting right on the return and not worth rearranging the financial aid over.

Section 25A(g)(2) bars claiming the American Opportunity Credit on expenses paid with tax-free scholarship. When the award nearly covers tuition, the family is left with too little out-of-pocket tuition to fund a credit worth 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, up to $2,500 per student under IRC §25A.

If the award's terms permit it to be applied to room and board, and a Pell Grant's do, the student can choose to include part of it in income. That treats the money as having paid non-qualified costs and frees the tuition to support the credit. Publication 970 sets the boundary: the credit can increase only when qualified expenses minus scholarships come to less than $4,000.

The trade is usually lopsided. Moving $4,000 into a student's income at a 10% rate costs $400 and buys $2,500 of credit. Run the numbers whenever box 5 nearly equals box 1 and modified AGI is under the phaseout, which for 2026 still runs $80,000 to $90,000 single and $160,000 to $180,000 joint and has never been indexed for inflation. One caution: a dependent full-time student under 24 with a living parent cannot claim the refundable 40%, so the credit belongs on the return of whoever claims the student, where it offsets real tax. Sorting out which return an item lands on is its own exercise, the same problem as allocating a 1095-A to a non-dependent adult child.

Section 117(c)(1) strips the exclusion from any portion of an award representing payment for teaching, research, or other services required as a condition of receiving it. A research assistantship stipend is compensation. It belongs in wages, and not a dollar of it is excludable even if the student spends every dollar on tuition.

The tuition waiver that comes with the assistantship is a separate item and usually survives. Section 117(d)(5) lets a graduate student engaged in teaching or research activities exclude a graduate-level tuition reduction, so the stipend is taxed and the waiver generally isn't. Whatever is left in a 529 after all of this has an exit of its own, covered in the 529-to-Roth rollover rules.