Scholarships used to pay qualified expenses (tuition, fees, books and required course materials) are tax free. So, yes, they can be "deducted" in determining the taxable amount. Usually, a student only has taxable scholarship income, if box 5 of the 1098-T exceeds box 1.
Taxable scholarship must go on the student's return, not the parents. It's not optional.
You do not report his/her income on your return. If it has to be reported, at all, it goes on his own return. If your dependent child is under age 19 (or under 24 if a full time student), he or she must file a tax return for 2020 if he had any of the following:
- Total income (wages, salaries, taxable scholarship etc.) of more than $12,400 (2020).
- Unearned income (interest, dividends, capital gains, unemployment) of more than $1100.
- Unearned income over $350 and gross income of more than $1100
- Household employee income (e.g. baby sitting, lawn mowing) over $2100 ($12,400 if under age 18)
- Other self employment income over $432, including money on a form 1099-NEC
Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.
In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.
