How to correctly report Grants & Scholarships from 1098T on taxes - are they income?

This is a common source of confusion! The way scholarships and grants are reported depends on how they were used. Here's the general rule: scholarship/grant money used for qualified education expenses (tuition, fees, books) is NOT taxable income. However, any scholarship/grant money used for non-qualified expenses (room and board, transportation, etc.) IS taxable income. It sounds like TurboTax might be counting all your scholarship/grant money as income, while FreeTaxUSA might not be counting any of it as income. The correct answer is probably somewhere in between, depending on how you used the funds. For the American Opportunity Credit and other education credits, you can only claim expenses that you paid out of pocket - not expenses paid by tax-free scholarships. So if all your qualified expenses were covered by scholarships, you wouldn't get education credits. I'd suggest going back through both programs and making sure you're correctly indicating which portion of your scholarships/grants went to qualified expenses versus non-qualified expenses. That will likely resolve the discrepancy.

I had the EXACT same problem last year. It was so frustrating! I ended up using https://taxr.ai to analyze both my tax returns side by side. The tool immediately highlighted that my 1098-T was being processed differently between the two software programs. With TurboTax, all my scholarship money was being counted as income (which wasn't right), while FreeTaxUSA was excluding it all from income (which also wasn't completely right). What I learned was that I needed to manually allocate how much of my scholarship went to qualified expenses versus living expenses. I was able to upload my 1098-T and financial aid statement to taxr.ai and it showed me exactly how to categorize everything correctly. Ended up getting about $450 more on my refund than either software had calculated on its own!

Just wanted to follow up after trying taxr.ai that someone recommended earlier. Wow, what a difference! I uploaded my 1098-T and financial aid statement, and it immediately identified that both tax programs I was using had it wrong. Turns out $3,200 of my scholarship should have been reported as income because it exceeded my qualified expenses, but the rest shouldn't be taxed. The tool showed me exactly where to make these corrections in both tax software programs I was using. It also explained how this affected my American Opportunity Credit calculation. The best part was the explanation of WHY this was happening - with actual references to IRS Publication 970. Now I finally understand how to report this correctly! My refund ended up about $340 higher than what either program calculated on its own.

This scholarship/grant reporting issue is exactly why I couldn't get through to the IRS last year. I spent DAYS trying to call them to confirm how to handle my daughter's scholarship income. Completely gave up after waiting on hold for 3+ hours multiple times. Finally found https://claimyr.com and their video showed how it works: https://youtu.be/_kiP6q8DX5c - they basically hold your place in the IRS phone queue and call you when an agent is about to answer. Totally changed my experience! Got through to an actual IRS agent in about 45 minutes instead of waiting all day. The agent confirmed exactly what others have said here - scholarships used for qualified expenses aren't taxable, but anything used for room and board or other non-qualified expenses IS taxable. She also explained how this impacts education credits since you can't double-dip by claiming credits on expenses paid with tax-free scholarship money.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself because I've been trying to reach the IRS about my deceased father's final tax return for weeks. The service actually worked exactly as described. I entered my phone number, and about 2 hours later (while I was grocery shopping), I got a call connecting me directly to an IRS representative. No waiting on hold, no frustration - just an immediate connection to someone who could help. The agent was able to answer all my questions about handling my dad's return and even helped with an issue related to some scholarship money my daughter received that I was reporting incorrectly. Saved me from making a costly mistake. I'm genuinely impressed and apologize for my skepticism. Sometimes good services actually exist!

As someone who works in a university financial aid office, I can clarify a few things: 1. Box 1 on your 1098-T shows amounts BILLED for qualified tuition and expenses. 2. Box 5 shows scholarships/grants. 3. If Box 5 is LARGER than Box 1, the difference is potentially taxable income. The software confusion is likely happening because you need to manually indicate which expenses were qualified vs. non-qualified. Some programs default differently. Also, double-check if you're eligible for American Opportunity Credit - it has specific requirements including being enrolled at least half-time in a degree program.

Has anybody here used Credit Karma Tax (now Cash App Taxes) for reporting scholarships? I tried it and got a COMPLETELY different result than both TurboTax and FreeTaxUSA... now I'm even more confused 😭

I'm dealing with a similar situation right now! My son is a sophomore and we've been struggling with this exact issue for two years. What I've learned is that the key is understanding the "coordination" between scholarships and education credits. Here's what helped us figure it out: create a simple spreadsheet with three columns - total scholarships received, qualified education expenses (tuition, fees, required books), and non-qualified expenses (room, board, personal expenses). The tricky part is that you actually have some choice in how to report this! You can elect to treat some scholarship money as taxable income if it results in a better overall tax outcome when combined with education credits. Sometimes paying a little tax on scholarship income is worth it if you can claim a larger American Opportunity Credit. I'd recommend manually calculating both scenarios - treating all possible scholarship money as non-taxable vs. treating some as taxable to maximize your education credits. Whichever gives you the better net result (refund minus any additional tax on scholarships) is usually the way to go. The software programs handle this differently because they make different default assumptions about your preferences. That's why you're seeing such different results!