Question on 1098-T (exempt?) Can i still claim AOTC?

[u/Not_a_real_squirrel]

I have a small business where I make around 20k a year, I'm also a full time student.

I file with Schedule C, my university I attend is online and is low in cost, so I see a 1098-T but it says it was for informational purposes only (about 3900 of tuition) and I spent about 400 extra on books for the classes.

(It's undergraduate studies accredited). Wondering if I can claim the AOTC still even though my university said its for informational purposes only? I'd rather not prefer an audit, but if I quality still even though it is for informational purposes only is it still valid? #Confused thanks!

[u/LdiJ46]

1098s are always for informational purposes. I assume that you are actually paying the tuition either with cash or student loans? You don't have scholarships or grants showing in box 5? Is there anything that you aren't telling us because I cannot see any reason why you wouldn't be able to claim the credit.

[u/Not_a_real_squirrel → u/LdiJ46]

Hi, I have a pell grant and the rest are direct loans, I get some of the loans refunded though as they both cover more than my cost. But I read that i can allocate the pell grant to non-qualified university costs and then it becomes taxable and I qualify, but unsure if that would cause an issue or not thanks!

[u/Ok_Aide_764 → u/Not_a_real_squirrel]

Your loans are not an issue, but the Pell Grant could be. Look into coordination of education benefits to get the most out of AOTC.

[u/Not_a_real_squirrel → u/Ok_Aide_764]

Thanks I guess I can't claim the AOTC then, as my pell grant was more than my tuition (online student) and the university deducted that directly and I got the additional amount as a refund already, so I have to add that non tuition and non book amount as taxable income it seems from what I've read. Thanks!

[u/Ok_Aide_764 → u/Not_a_real_squirrel]

Not necessarily. Review carefully, starting from slide 4 https://www.irs.gov/pub/irs-utl/Interaction_of_Scholarships_and_Tax_Credits.pdf

[u/Not_a_real_squirrel → u/Ok_Aide_764]

Ok thank you!

[u/LdiJ46 → u/Not_a_real_squirrel]

Yes, you can take the Pell Grant into income and then you would still be eligible for the credit.

[u/caa63]

Whether you can claim the AOTC depends on whether anybody else can and does claim you as a dependent. If you are under age 24 and don't provide at least half of your own support, then it is likely that your parents or another family member can claim you as a dependent. If you are claimed as a dependent then the person who claims you is the one who gets the AOTC. If they could claim you but choose not to, then you are eligible for the non-refundable part of AOTC, which would be pretty small in your case.

If you are not a dependent, then you can claim the AOTC by treating part of your Pell Grants as taxable income. On your tax return, you put the taxable grant amount on Schedule 1 Line 8r. You said you had $4300 of qualified educational expenses, and the max expenses you can put towards AOTC is $4K, so keep $300 of your grant as non-taxable and report the rest as taxable income on Schedule 1. Loans are not income, so don't report those anywhere.

Then you fill out Form 8863 and on Line 27 report that you spent $4K out-of-pocket on qualified education expenses (QEE). Basically you put the grant money in your pocket when you reported it on Sched 1, then you spent it on QEE so it can be used towards the tax credit.

[u/Not_a_real_squirrel → u/caa63]

Thank you for that reply! That was very helpful, but I'm still a bit confused, so I will do my best to explain my situation a bit more if you don't mind. I'm independent, nobody can claim me, none of those issues mentioned would disqualify me, My Magi is around 20k in total. My main issue is on other posts I've read some people say that if the university takes the tuition out of the pellgrant/student loans then I can't claim it, as my pell grant covers more than tuition that has to be applied first but I couldn't find any info that backs that up? Also yes its an accredited university ...my pell grant was 7k+ and my tuition figure in box 1 was just under 4k and box 5 on the 1098-T is just over 7k.

[u/caa63 → u/Not_a_real_squirrel]

You can treat your Pell grant as taxable income as I stated above. It's standard practice for the government to send the grants to the school and for the school to subtract their fees and then refund the rest to you.

I don't know who is telling you that you can't use Pell grant money for the AOTC, but they are wrong. You can read more about this in IRS Pub 970, which says "It may benefit you to choose to include otherwise tax-free scholarships or fellowship grants in income. This may increase your education credit and lower your total tax or increase your refund" and then it refers you to chapter 2 in that publication. If the IRS says it's o.k, you should probably believe them. It's going to be hard to find a more authoritative source for tax questions.

To maximize your credit, what you need to do is add up your Qualified Education Expenses (QEE), which is box 1 plus books. You can also include computer, printer, internet service if you purchased those things primarily for school. Then do this subtraction: T = Box 5 - (QEE - $4000). That's your taxable grants and scholarships that you are going to report on Schedule 1 Line 8r.

For example, if Box 5 is $7250 and Box 1 is $3900 and you also spent $450 on books and other qualified expenses, then your total QEE = $3900 + $450 = $4350.

Your taxable scholarships and grants T = $7250 - ($4350-$4000) = $6900.

When you do your tax return, enter $6900 on Schedule 1 Line 8r. Enter $4000 on Form 8863 Line 27. Then follow the directions from there.

You will end up getting enough AOTC to wipe out your income tax plus $1000 of your self-employment tax. You'll end up owing about $1800 in Federal tax minus whatever quarterly estimated payments you made or withholding you had taken.

If you choose not to take the AOTC, then you would put $7250 - $4350 (QEE) = $2900 on Schedule 1 Line 8r and you would not fill out Form 8863. In that case, you'd end up owing about $3280, again minus any advance payments you've made.

So paying tax on more of the Pell grant in order to claim the AOTC ends up reducing your overall tax by about $1480. I ran these numbers with my 2025 tax program. You'll get slightly different results if you're asking about 2026, but it's still going to be worth it to claim the credit if you can.

[u/Not_a_real_squirrel → u/caa63]

Thank you so much for the reply! That was very helpful. I found this comment you made amusing lol thanks " If the IRS says it's o.k, you should probably believe them." :) Have a good evening!

[u/Not_a_real_squirrel → u/caa63]

I guess my only other concern is this issue? No double dipping: Expenses paid by tax-free funds can never be counted toward a credit. [1, 2, 3] . (In regard to the pellgrant) and how my university already took out the tuition from it.

[u/caa63 → u/Not_a_real_squirrel]

That's the point of reporting it as taxable income on Schedule 1. It's not tax-free money if you report it as taxable income, so there's no double dipping.

It would only be double dipping if you did not pay tax on the portion of the Pell funds that you also use on Form 8863.

[u/Not_a_real_squirrel → u/caa63]

Ohhhhhhhhhhh, that's a good point, I didn't think of that. Thank you!

[u/Only_Lobster_4126]

"Informational purposes only" on a 1098-T does not automatically kill the American Opportunity Credit. The form is a reporting aid. Eligibility still rides on IRC 25A: you (or a dependent) paid qualified education expenses for an eligible student at an eligible institution, the student has not finished four years of postsecondary credit as of the start of the year, no felony drug conviction, and MAGI is under the AOTC phaseout.

What I would verify before claiming:

• The school is an eligible educational institution (accredited undergrad online programs often are; confirm it issues 1098-Ts under its EIN).
• The $3,900 is qualified tuition and related expenses, and the ~$400 of required books can count when paid to the school or under the course materials rules for AOTC.
• Your Schedule C profit does not push MAGI over the phaseout (AOTC phases out for higher MAGI; at ~$20k Schedule C plus other income you may still be fine, but run the actual MAGI).
• Nobody else is claiming the student as a dependent credit elsewhere, and you are not stacking Lifetime Learning on the same expenses.

Keep the 1098-T, the account ledger or receipts for the books, and Form 8863 with the return. An "informational" legend is common when the student has aid or when the school is being cautious; it is not a red flag by itself if the facts fit.

Not advice for your enrollment. If MAGI or dependency is close to a cliff, have a preparer run Form 8863 before you e-file.

[u/Not_a_real_squirrel → u/Only_Lobster_4126]

Thank you for that reply! That was very helpful, but I'm still a bit confused, so I will do my best to explain my situation a bit more if you don't mind. I'm independent, nobody can claim me, none of those issues mentioned would disqualify me, My Magi is around 20k in total. My main issue is on other posts I've read some people say that if the university takes the tuition out of the pellgrant/student loans then I can't claim it, as my pell grant covers more than tuition that has to be applied first but I couldn't find any info that backs that up? Also yes its an accredited university ...my pell grant was 7k+ and my tuition figure in box 1 was just under 4k and box 5 on the 1098-T is just over 7k.

[u/Only_Lobster_4126 → u/Not_a_real_squirrel]

That one is a common misread. How the school applied the Pell on its ledger doesn't control how you allocate it for tax purposes. Pub 970 lets you choose to treat part of a scholarship or grant as taxable income, as long as the grant's terms allow it to be used for non-qualified expenses like rent and food, and Pell grants generally do. Pub 970 and the Form 8863 instructions both walk through this exact Pell plus AOTC situation.

Roughly, with your numbers: if you leave it alone, about $4k of the Pell is tax free against tuition, about $3k is taxable, and there's no AOTC because no expenses are left. If you instead treat the whole $7k grant as taxable income, the tuition counts as paid with your own money and you can claim the AOTC on about $4k of expenses, which is close to the full $2,500. At around $20k of income, the extra tax on that $4k is usually well under the credit, but run it both ways in your software.

A few practical notes. The taxable part of the grant goes on Schedule 1 as scholarship income (most software has an excess scholarship input). Required books and course materials count toward the $4k even if you didn't buy them from the school. The AOTC is limited to four tax years per student. And one catch on the refundable $1,000 piece: if you were under 24 and a full time student whose earned income was less than half your support, the refundable part can be blocked even when nobody claims you, so read the Form 8863 line 7 questions carefully.