Educational expenses and lifetime learning credit

[diamondd00]

Hi. I've a ft student that was a 4th year college student in 2016 for more than 6months. She had $6,900 in tuition expenses, $500 in textbooks purchased directly from the university, and a univ. scholarship for $8,295. I realize that the scholarship exceeds the $6900 tuition amount. Turbo is giving me a lifetime learning credit amount on $1133. I wanted to know if this is correct so I can make sure I'm reporting correctly. Thank you.

[Hal_Al]

No. But, it can be.

The general rule is that you may only claim expenses that were not paid by tax free scholarship. In fact, with numbers you have; you get no education credit and your dependent student must report $895 of taxable income (8295-6900-500=895) on her return. 

However, there is a tax “loophole” available. The student reports ALL her scholarship, as income on her return. That way, the parents 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.