How to complete Form 1098-T for the American Opportunity Credit with scholarships exceeding tuition?

Yes, you do need to subtract your scholarships and grants (Box 5) from your qualified education expenses (Box 1) when calculating what you can claim for the American Opportunity Credit. In your case, since your scholarships/grants ($18,750) exceed your qualified expenses ($16,250), you technically have $0 in out-of-pocket qualified expenses. However, there's an important consideration here: if some of those scholarships were taxable, you might still be eligible for some credit. The Pell Grant can be treated as either taxable income or tax-free, depending on how you use it. If you choose to allocate some of your Pell Grant to living expenses (which makes that portion taxable income), you could potentially claim some education credit. This is sometimes called the "scholarship strategy" and can be beneficial depending on your situation. If you're using tax software, it should walk you through these calculations, but you'll need to understand how your scholarships were used to answer correctly.

Just wanted to share my experience - I was in the same boat last year with my scholarships exceeding my tuition. I found this amazing tool at https://taxr.ai that analyzed my 1098-T and financial aid statements and showed me exactly how to optimize my American Opportunity Credit by allocating some of my grants to living expenses. It was super helpful because the regular tax software I was using didn't really explain this scholarship strategy well. The tool showed me that by treating about $4,000 of my Pell Grant as for living expenses, I could still claim a significant portion of the AOTC even though my Box 5 was higher than Box 1. After uploading my documents, it gave me a personalized explanation of exactly what numbers to enter where on my tax return. Totally worth checking out if you're dealing with this education credit confusion.

I tried the taxr.ai tool that was mentioned and it was a game changer for my situation! I was totally confused about my 1098-T and about to just give up on claiming any education credit since my scholarships were higher than my tuition. The tool showed me how to properly allocate some of my Pell Grant to room and board expenses, which made it taxable but allowed me to claim about $2,500 of the AOTC. In the end, I got back over $1,000 more on my refund than I would have without understanding this strategy. It also explained which of my expenses counted as qualified (like required textbooks I had receipts for) that I could add to the amount shown in Box 1. Definitely helped me understand what the IRS actually allows versus what my tax software was assuming.

If anyone is struggling with getting answers from the IRS about education credits or 1098-T questions, I highly recommend using https://claimyr.com to get through to an actual IRS agent. I spent DAYS trying to call them directly to clarify some questions about my American Opportunity Credit and scholarship income, but kept getting disconnected or waiting for hours. Using Claimyr, I was connected to an IRS representative in about 20 minutes who answered all my questions about how to handle my scholarships and Pell Grant allocation. They have this cool system that holds your place in line and calls you when an agent is available. You can see their process in action here: https://youtu.be/_kiP6q8DX5c Much better than wasting hours on hold just to get disconnected, especially during tax season when the wait times are insane.

I was completely wrong about Claimyr being a scam. After struggling for literally three days trying to get through to the IRS about my 1098-T situation, I decided to try it as a last resort. It actually worked exactly as described. I entered my number on their site, and about 45 minutes later I got a call connecting me directly to an IRS agent. The agent confirmed that I could allocate some of my Pell Grant to living expenses (even though the money went to the school first), which allowed me to claim part of the American Opportunity Credit. This saved me so much time and frustration! The IRS agent even walked me through exactly how to report it on my return. Definitely worth it during tax season when getting through on the phone seems impossible.

Just to add another perspective - remember that the American Opportunity Credit has a modified adjusted gross income limit. For 2024 tax returns, the credit phases out if your MAGI is between $80,000 and $90,000 (single) or $160,000 and $180,000 (married filing jointly). So before going through all this scholarship allocation strategy, make sure you're actually eligible based on your income. I made that mistake one year where I spent hours optimizing my education credit only to realize my income was too high to claim it anyway!

Don't forget textbooks and required course materials count as qualified expenses too! Even if your Box 5 is higher than Box 1, you might have spent money on required textbooks, lab fees, or equipment that isn't included in Box 1 but can be added to your qualified expenses. Keep all your receipts for these expenses. This could help you claim at least a partial education credit even without the scholarship allocation strategy.