Since box 1, of his 1098-T, exceeds the amount in box 5, none of his scholarship is taxable, or reportable. The difference is enough that you can claim the education credit. $38,870 - 32,819 = $6051. You only need $4000 to claim the $2500 American Opportunity credit.
You may still claim him as a dependent. A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
1. He is under age 19, or under 24
if a full time student for at least 5 months of the year, or is totally & permanently
disabled
2. He did not provide more than 1/2 his own support. Scholarships are
considered third party support and not as support provided by the student.
3. He lived with the parent
(including temporary absences such as away at school) for more than half
the year
So, it doesn't matter how much he earned. What matters is how much he spent
on support. Money he put into savings does not count as support he spent on him
self.
The support value of the home, provided by the parent, is the fair market
rental value of the home plus utilities & other expenses divided by the
number of occupants.
Furthermore, there is a rule that says IF somebody else CAN claim him as a
dependent, he is not allowed to claim himself. If he has sufficient income
(usually more than $12.000), he can & should still file taxes. In TurboTax,
he indicates that somebody else can claim him as a dependent, at the personal
information section. TT will check that box on form 1040.
Even if he had less, he is allowed to file if
he needs to get back income tax withholding. He cannot get back social security
or Medicare tax withholding.
