If the school my son attended as a full-time student received the entire award and applied it to his tuition, why do I or he have to claim it as income?

[Bsch4477]

It would only be income if the scholarship amount was greater than the qualified education expenses. 

[Vanessa A]

You do not claim it as income on your return.  If your son attended school and his scholarships and grants were greater than his tuition and qualified education expenses, then he would need to report it on his return as income. 

If he has a 1098T with income Scholarships greater than the tuition, then yes, this would be considered income and need to be entered on the return, but it would be on HIS return.  This could also be subject to the kiddie tax, if it is more than $2,500, since this is unearned income, so depending on how much more the grants and scholarships were than the tuition and expenses, he may or may not have a $0 return.  Also, if he has other income, he will need to include any overages on his return regardless of how small the amount over is.

If he chooses to treat all of the scholarship as used for education expenses, then you would not be able to claim any education credits.  Assuming you are claiming him as a dependent on your return. If you claim all of the eligible education expenses for education credits, he can report the scholarship as not used for education expenses at all.  You can choose various scenarios in between to maximize your education credits and minimize his taxable liability. 

For instance, if box 1 of his 1098-T is $10,000 and box 5 is $16,500.  You could choose to claim $4,000 in education expenses for the AOTC education credits on your return, and he would claim $6,000 as the amount of scholarship used for his education expenses, so he would have income of $10,500.  

Tax Benefits for Education

[Hal_Al]

Q. f the school my son attended as a full-time student received the entire award and applied it to his tuition, why does he have to claim it as income?

A. He doesn't.  

But if the school applied it to non qualified expenses, like  room and board, then it is taxable.  Anytime box 5 of the 1098-T is larger than box 1, the assumption is that the difference is taxable unless you have proof that there were other qualified expenses, and that's unlikely as all the tuition (the main qualified expense) is already in box 1.