If Box 5 (scholarships) is more than box 1 (tuition) you might need to file and claim the difference as taxable income.
Q. How do you claim the difference on the tax return within turbo tax? Is there a specific form that needs to be added to the income area?
A. Do not enter in the income section of TurboTax (TT). Enter the 1098-T in the "Educational Expenses and Scholarships (1098-T)" section, under "Deductions and Credits". Scholarship oncome is reported on line 8r of Schedule 1. TT will place it there automatically. If the difference is less than $14,600 and that is your only income, you are not required to file a tax return. But you want to anyway, to claim the "loop hole" tax credit.
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There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. 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 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.
The way you enter this in TurboTax (TT), when asked if any of the scholarship paid for room & board, in the interview, enter $6000 (in the 1st example above).
The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit". PUB 970 even has examples of how to do the “loop hole”.
