I assume you are filing as Married Filing Joint. References to "you", "your", "yours", "his" or "hers" means both of you.
Monies awarded by the Hazelwood Act are a scholarship. But take special note that this does not include living expenses, books, or supply fees. It's specifically designated for tuition only. This is clearly stated on the website at https://www.va.txstate.edu/benefits/hazlewood.html
Qualified education expenses that are not paid with money you earned either from a W-2 job or self-employment is considered third party income. This includes scholarships, grants, 529 distributions, gifts from Aunt Mary, etc.
For the most part, all third party income is treated as scholarships and/or grants. 529 distributions are third party, but get a little different treatment. I will not discuss 529 distributions since there is no indication you received any 529 distributions.
Not all scholarships/grants will be included in box 5 of the 1098-T. Likewise, not all qualified education expenses will be included in box 1 of the 1098-T either. Just enter the 1098-T "EXACTLY" as printed. Then followup screens will ask you for other 3rd party income and qualified expenses not included on the 1098-T.
Qualified education expenses are tuition, books, and lab fees. That's it with no exception.
Tuition - Includes enrollment fees, registration fees and any other fee that was paid as a requirement to complete the course.
Books - What was paid for the books required for the course. These books are usually identified in the course syllabus. Note that for "GRADUATE" classes books are not a deductible expense. Books are only deductible for an undergraduate course.
Lab fees - This category can be rather broad, so if you're wondering if a specific expense qualifies as a lab fee, just ask. For example, if a computer was needed to complete course work and you went out and purchased a computer (desktop or laptop) for the *PRIMARY* purpose of meeting the course requirements, then the cost of the computer can be included as a lab fee. Likewise, if internet access in your home was required to complete online course requirements and you obtained that access for the *PRIMARY* purpose of meeting those requirements, then the cost of Internet access for the term of that course would be deductible as a lab fee. This would include the cost of hookup too.
However, if your home already had internet access prior to the earliest enrollment date, then it's primary purpose was not to meet course requirements and none of the Internet cost is deductible as a lab fee.
