Tax Talk with Dr. Mary Marshall - Tax Tips for Students: What to do with Form 1098-T

Do I pay taxes on my student loans, grants and scholarships?

Soon you'll begin receiving your Form 1098-T for 2024. These forms include any scholarships or financial aid that could potentially be taxable and the expense information you need to report college costs on your (or your parents) tax return. Students often have unique needs when it comes to filing a tax return. The most common questions are about tax credits for college costs and whether scholarship income from the 1098-T is taxable.

Are financial aid refunds taxable?

In general, income is always taxable unless the tax code specifically excludes it. When considering scholarships, grants, and other financial aid, the key is determining two items. First, is it actually income; and second, did you use it to pay for qualified education expenses? Here are a few tips:

• Loans are not considered to be income because a student has an obligation to repay the funds. Generally, loan proceeds would not be considered taxable income.
• Grant and scholarships may be taxable to the extent the grants exceed the qualified education costs for the year. As explained by the IRS here, those qualified costs include "tuition, or fees, books, supplies, and equipment required for courses at the education institution." Importantly, room and board are not considered to be qualified expenses.

What are higher education credits, and who is eligible for them?

Although some students have grants and scholarship to cover the cost of college, many have costs that were not covered by grants or scholarships. In that case, students who meet specific requirements have the option to claim a higher education tax credit.

Congress has authorized two credits for higher education costs: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC provided a tax credit of up to $2,500 to students enrolled at least half-time. It is only available for the first four years of higher education. The LLC offers a tax credit of 20% of higher education costs, up to $2,000. It is not limited to four years like the AOTC, so students can benefit from the LLC if their studies continue past the initial four years. Both the AOTC and LLC are only available to taxpayers who make less than $90,000 ($180,000 if filing jointly with a spouse). Further, only college costs that exceed any grants or scholarships can be used to claim a tax credit. These tax credits represent a direct reduction of the amount of taxes owed.