The main breakdown of leftover scholarship money covers which portion of a scholarship is taxable -- tuition and required fees are tax-free, room and board and other living costs aren't. What it doesn't cover is the actual mechanic for figuring out and reporting that split, which is on the student to calculate -- the form your school sends doesn't do it for you.

Form 1098-T doesn't answer the question -- it gives you two numbers to compare yourself

Your school issues Form 1098-T each year, but per its own stated purpose, it exists mainly to support education tax credits (the American Opportunity Credit and Lifetime Learning Credit via IRS Forms 8863/8917) -- it does not tell you whether you owe tax on a scholarship. The two numbers that matter are Box 1 (payments received for qualified tuition and related expenses) and Box 5 (scholarships, grants, and fellowships the school is aware of). Treat Box 1 as the maximum amount that can be tax-free, and Box 5 as the total award. If Box 5 is larger than Box 1, the difference is taxable income -- and the IRS receives the same form you do, so it already has a basis to expect that difference reported on your return.

Who actually has to do the math

The form's own instructions are explicit on this: it's the student's own responsibility to calculate and report the taxable portion, not something the school does for you or automatically withholds. A concrete version of the example already established in the main breakdown: a $15,000 scholarship split $8,000 toward tuition and $7,000 toward room and board would typically show up as Box 1 lower than Box 5 by roughly that $7,000 gap -- and that gap is what you're expected to report as income, not something that appears pre-calculated anywhere on the form itself.

Where it actually goes on your return

Once you've isolated the taxable amount, it doesn't get folded into "wages" on your return -- there's a specific line for it, separate from whatever a W-2 reports.

For 2025 returns, taxable scholarship or fellowship income that was not reported on a Form W-2 goes on Schedule 1 (Form 1040), Line 8r, which is labeled directly on the form itself: "Scholarship and fellowship grants not reported on Form W-2." From there it flows into Schedule 1's Line 9 ("Total other income"), then Line 10, then onto Form 1040, Line 8. That's been the mechanic since the IRS restructured Schedule 1 in 2022 to give scholarship income its own dedicated line. Before that, the amount went on Form 1040's wages line with "SCH" written next to it -- that notation isn't part of the current form; Line 8r is already pre-labeled, so there's nothing to write in by hand.

If part of an award was actually compensation for required services (a teaching or research stipend structured as pay, for example) and was reported on a W-2, that portion is ordinary wages and goes on Form 1040 Line 1a like any other W-2 income. Line 8r is only for the taxable amount that never touched a W-2.

Does the student even have to file at all? Not automatically. For 2025, a taxpayer who can be claimed as a dependent has to file a return if any of the following apply: unearned income over $1,350; earned income over $15,750; or, for a mix of both, gross income above the larger of $1,350 or earned income (capped at $15,300) plus $450. The detail worth knowing: for this specific test, the IRS counts a taxable scholarship as earned income, not unearned income, even though it isn't pay for work. So a student whose only income is a $7,000 taxable scholarship portion doesn't clear the $15,750 threshold on that alone and generally isn't required to file -- though filing can still be worth it to recover withholding from a part-time job, or the math changes once other income is added in. These figures are set annually, so re-check them for whatever year you're actually filing.

Withholding and estimated tax. A scholarship isn't a paycheck, so nothing gets withheld from it automatically the way income tax gets withheld from wages. If the taxable portion is large enough that withholding from a job (or a parent's return, if applicable) doesn't cover the resulting tax, the student may need to make quarterly estimated tax payments to avoid an underpayment penalty. This is a real issue for a large fellowship or stipend, less so for a routine few-thousand-dollar room-and-board gap.

Where to actually find the rules in writing

IRS Publication 970 ("Tax Benefits for Education") is the primary source governing exactly which expenses qualify as tax-free and which don't -- worth reading directly, or working through with a tax preparer, rather than relying on a general "room and board is taxable" rule of thumb for a specific, larger award where the exact dollar split actually matters.

What this means for you

  • Don't assume the 1098-T tells you what you owe -- it gives you Box 1 and Box 5; the comparison and the reporting are on you.
  • If Box 5 exceeds Box 1, expect to report that difference as income -- the IRS has the same information you do and can flag a mismatch.
  • Keep your own record of exactly what each dollar of a scholarship was actually spent on -- tuition and required fees versus room, board, and other living costs -- since that split is what determines the taxable amount, not the total award figure alone.
  • For a large or unusually structured award, check IRS Publication 970 directly or use a tax preparer rather than assuming a rule of thumb covers your specific situation.
  • This is one piece of the larger leftover-scholarship-money picture -- see the full breakdown for displacement, refund mechanics, and the 529 penalty-waiver rule this connects to.

Sources