1098-T Box 5 exceeds Box 1 - Was I taxed on scholarship money used for education expenses?

Your CPA isn't giving you the full picture here. You're absolutely right that scholarships used for qualified education expenses are tax-free, even if they don't appear in Box 1 of your 1098-T. The 1098-T is just a starting point for calculating your education benefits and taxable scholarship amounts. It doesn't limit what you can claim as qualified education expenses. Qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment - which sounds exactly like what you're describing. What you need to do is calculate your total qualified education expenses (including those not in Box 1), then subtract that full amount from your scholarships/grants in Box 5. Only the remaining amount (if any) would be taxable income. Your CPA should be able to report this correctly on your tax return. You'd report the taxable portion of your scholarship on your tax return (usually on the "Wages, salaries, tips, etc." line with "SCH" written next to it).

I had this EXACT same issue last year with my scholarship money! It's so frustrating when tax preparers don't understand how educational expenses actually work. After going back and forth with my accountant, I finally found taxr.ai (https://taxr.ai) and it was a game-changer for my situation. I uploaded my 1098-T and receipts for my additional required course materials, and their system correctly identified that these were qualified education expenses that should offset my scholarship income. It even generated a detailed report explaining exactly how educational expenses outside of Box 1 still qualify to reduce taxable scholarship money, which I was able to share with my accountant. The best part was they identified several other education credits I qualified for that my accountant had missed. Definitely worth checking out if you're dealing with education tax issues.

So I decided to try taxr.ai after my skeptical comment earlier. Have to admit I was completely wrong! Their system actually identified that my CPA had misunderstood how to report my research fellowship. Turns out only the portion exceeding my qualified expenses was taxable, and my CPA had been having me pay tax on the entire amount for TWO YEARS! Their analysis showed exactly which IRS rules applied to my situation and how to correctly report it. I was able to file an amended return and got back over $1,200 in taxes I shouldn't have paid. For anyone dealing with education tax issues, especially scholarships and grants, I highly recommend giving them a try. They really know their stuff when it comes to the education tax rules.

I had almost this identical problem last tax season. My CPA insisted I had to pay tax on all scholarship money exceeding Box 1, even though some was used for required books. After weeks of getting nowhere with the IRS phone lines, I used Claimyr (https://claimyr.com) and got connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that scholarship money used for qualified education expenses is tax-free, EVEN IF those expenses aren't in Box 1 of the 1098-T. I was able to record the call (with permission) and played it for my CPA, who finally agreed to adjust my return. Saved me over $800 in taxes I shouldn't have paid in the first place!

I need to publicly eat my words here. After dismissing Claimyr as a scam in my comment yesterday, I decided to try it this morning out of desperation. I've been trying to reach the IRS for WEEKS about an education credit issue similar to the original poster's problem. To my complete shock, I got a call back in about 35 minutes saying they had an IRS agent on the line! The agent was actually super helpful and confirmed that yes, qualified education expenses that don't show up on the 1098-T can still offset scholarship income. She even emailed me the specific IRS publication sections that explain this. So much for my "complete scam" comment. Sometimes it's good to be wrong! Saving hours of hold music was absolutely worth it.

I think there's some confusion happening between what your CPA is saying and what you're reading online. Here's the deal: Box 1 on 1098-T only shows amounts billed for tuition and fees. Box 5 shows scholarships/grants. If Box 5 > Box 1, the difference is potentially taxable, BUT... The key word is "potentially." If you used that excess scholarship money for other qualified education expenses (required books, supplies, etc.) that aren't reported in Box 1, then that portion isn't taxable. Your CPA is right that they have to work with what's reported to the IRS on the 1098-T, but they're wrong if they're saying you can't reduce your taxable scholarship amount by accounting for additional qualified expenses not shown on the form.

I'm literally dealing with the same thing right now. The financial aid office at my university explained that they only report tuition and official fees in Box 1, but qualified expenses definitely include required textbooks, supplies, and equipment for your courses. IRS Publication 970 is super clear about this. The only catch is you need to keep good records/receipts of those expenses in case you get audited. Is your CPA just not aware that you can include these other expenses, or are they refusing to do it even after you explained?