Q. If the parent claims them, the student has a tax liability of $105. If the parents files the 1098-T, the student doesn't have to file, correct?
A. No. The 1098-T can (and should, in your case) go on both the student's and the parent's tax return*. In fact, if the parent claims the tuition credit (based on the "loop hole"), then the student's tax liability will increase.
Q. You make it seem like the parent files the tuition amount up to $4000, and then the student file taxes and claims the scholarship and the other $3,712 of tuition, Am I incorrect in my understanding?
A. Yes. Using your numbers: Student has $14556 in box 5 of the 1098-T and $7172 in box 1. At first glance he/she has $7384 of taxable income and nobody can claim the American opportunity credit. But if she reports $11384 (14556 - 3712 = 11384) as income on her return, the parents can claim the other $4000 of qualified expenses on their return. If she has book and/or computer expenses, the $11,384 can be reduced.
If that is her only income, she technically does not even need to file since the amount is less than $13,850**. But, some tax experts recommend that she file anyway, to document use of the loop hole.
*You can both use the 1098-T to enter the expenses. If you claim the tuition credit, you do need to report that you got one (the TurboTax interview will handle this) Your student should use the 1098-T because it makes entering scholarship income go smoother and puts the income in the right place on the tax forms ( line 8r of Schedule 1).
You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter in TT is not sent to the IRS.
Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately. In his interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording). Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return (line 8r of Schedule 1).
Be advised some people are saying they're not getting the "Amount used to claim the tuition credit" (or “Education Expenses used for a Tax Credit”) screen on the dependent’s interview. Check the student information work sheet (part VI, line 17) to verify it was entered. If not, the alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T.
There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the taxable amount in box 5. In that case the amount in the "Amount used to claim the tuition credit" box is 0 (if it comes up).
**Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for the kiddie tax and other purposes (EIC, IRA contributions or additional child tax credit).
