Basically which is the best strategy for parents ? Is my understanding that the student can choose from T-1098 box 5 (scholarship) to take that amount or part of it as income for the 1040.
The idea is to be able to claim AOC and the student as dependent.
If you can claim a credit, and it's more than the tax on the scholarship income, you should consider taking the credit.
If you're eligible for the American Opportunity Tax Credit (usually the more valuable credit) be aware that that credit maxes out with 4,000 expenses, so the student claiming any more than that (in this situation) would be a waste.
Also, the AOTC can only be claimed 4 times per student, so if you'll have a fifth year of expenses, think about the best years to claim it.
(The Lifetime Learning Credit can use up to 10,000)
Technically , the student can't "just decide" to claim scholarships as income, but they can allocate scholarship funds to "Other Education Expenses" like room and board or transportation.
Enter the 1098-T into your TurboTax program and complete the interview, including the "Education Information" section.
You'll know you finished when you get to "Maximize My Education Tax Break".
If you are eligible for the credit, and if the student's tax on the scholarship will be less than your credit, the program will figure that. The program will also tell you what amount the student needs to claim on her return.
Go back through the "Education Interview" a second time to see what the program is allocating towards a credit.
You can also see your credit options by typing letme into the search box and clicking the "Jump to letme" link.
As a final note, I should mention that if the student is your dependent by IRS rules, either you claim her, or no one claims her.