If my student paid $16000 in tuition but received a 1098-T for scholar./grants for $8500, does he claim the $8500 as unearned income, thereby invoking the Kiddie tax?

[kdekruif75]

This is for a college student.

[MaryK4]

No, scholarships and grants are tax-free as long as the student is a degree candidate and the money is used for "qualified expenses" (tuition, fees, books, and required equipment).  Since the tuition ($16,000) is much higher than the scholarship ($8,500), the entire $8,500 is considered spent on tuition.

Scholarships only become taxable "unearned income" if they are used for non-qualified expenses, such as room and board, travel, or optional equipment.
If your student had a $20,000 scholarship and only $16,000 in tuition, the remaining $4,000 used for room and board would be taxable.

[Hal_Al · Accepted solution]

Even though the student may have paid his tuition before receiving the scholarship, at tax time the scholarship is considered as allocated to the tuition (a qualified educational expense). Therefore, the scholarship is tax free. 

$16,000 tuition minus $8500 "paid by" tax free scholarship = $7500 of tuition that can be claimed by the parents for the tuition tax credit, if the student is their dependent.  They can do this even though it was the student that actually paid it. 

Here's a post on the five main points on the  1098-T:

https://ttlc.intuit.com/community/college-education/discussion/re-what-do-i-do-with-form-1098t/01/37...