1098-T file refund as income question

Yes, if your scholarship exceeds both your tuition expenses and your other qualified education expenses, the leftover is automatically added to your taxable income on Line 1 of Form 1040. If you preview Form 1040, you should see an amount written next to line 1 "SCH" then the amount of your scholarship that you are being taxed on.

Bear in mind that unless your scholarship specifically only covers tuition and fees paid to the school, they can generally be used for other expenses like supplies, books, and room and board. 

To preview your 1040:

1. Open or continue your return.
2. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
3. With the Tax Tools menu open, you can then view your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu
4. Scroll down until you see Form 1040 Line 1. This amount should include your excess scholarship income. 

Q.  Do I report my left over Pell grant refund money as income? Is this done automatically?

A.  Yes. TurboTax will treat the difference between box 1 and box 5 (assuming box 5 is more) as taxable income.  But, in addition to tuition and fees, books and computers (but not room and board) are qualifying expenses for tax free treatment of scholarships.  So, be sure to enter your book and computer costs to reduce your taxable scholarship.

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There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000