You've added to a question thread of another person that had a different situation than you.
If you can provide specifics to your tax situation, we might be able to help further.
To try to answer your specific questions, the 1098-T is reported by the school, and only reports what the school received as payments for tuition and fees (Box 1) and what went through the school as far as scholarships that were issued in the name of the student (box 5)
You also usually have expenses not listed on Form 1098-T, such as books and supplies. All these expenses can be used for an education credit and/or to offset the tax on scholarships.
Room and Board is also an expenses but can only offset tax on a education savings distribution (1099-Q). You can "allocate" scholarships to Room and Board, but that makes the scholarship reportable income (and potentially taxable income, it depends on your total income).
How is the out-of-pocket amount factored on Form 1098-T ?
Part of your "out-of-pocket" costs are reflected in the difference between Box 5 and Box 1. If the school says 10,000 was paid (Box 1) and 9,000 was scholarships, (Box 5) that would show that 1,000 came from somewhere else, usually paid out-of-pocket.
You would, in this example, have 1,000 to apply towards a credit and no taxable income (from the 1098-T)
You also continue through the Education interview after entering Form 1098-T where you can tell the TurboTax program of other expenses you paid for that are not listed on the 1098-T, and also if any part of the scholarship in Box 5 was used for something other than the expenses listed in Box 1. So for the example above, you can indicate that only 6,000 scholarship went to pay tuition which means 3,000 paid something else. You still have the 1,000 out-of-pocket, so that would give you 4,000 towards a credit.
You would, in this example, have 4,000 to apply towards a credit and 3,000 taxable income (from the 1098-T). The credit is usually more than the tax, so you usually come out ahead.
Pub 970 explains further and has some great examples of how to get the best break when you are paying for school.
@Momof2boyz
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