Q. Do we need to amend?
A. Probably.
The American Opportunity credit (AOTC) is very generous, 100% of the first $2000 of tuition and 25% of the next $2000. $2500 max on only $4000 of qualified expenses. Do the math, how much does box 1 (1098-T) exceed box 5. In addition, books and even a computer are qualified expenses. Room and board are not qualified expenses. There's even a loop hole that allows you to claim the entire box 1 amount for the AOTC, even though it was paid by scholarship.
______________________________________________________________________________________
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.
