Q. Would it be better if she files her taxes rather than me claiming her as a dependent?
A. It's not optional. If she qualifies as your dependent, she is not allowed to file as an independent.
Q. If I claim her as dependent and include her 1098T in my return, does she still have to file her own return?
A. Since she has a full ride scholarship, you cannot claim a tuition credit*. So, you do not include the 1098-T on your return. If she has sufficient income (usually more than $12,400**), she can & should still file taxes. In TurboTax, she indicates that somebody else can claim her as a dependent, at the personal information section. TT will check that box on form 1040. The $3K-4k she earned over the summer is taxable. I'm surprised she did not get a W-2 or 1099. It may have been included in box 5 of her 1098-T. Scholarships that pay for qualified expenses (tuition, fees, books and other course materials, including computers and software) are tax free. The portion of the scholarships that pay for room & board is taxable income. So, if her taxable scholarship and summer stipend add up to more than $12,400, she needs to file a tax return.
If the summer work is reported to her on a form 1099-NEC, it may (most likely) have to be reported as self employment income. The filing threshold for self employment income is only $433.
* There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $15,000 in box 5 of the 1098-T and $10,000 in box 1. At first glance she has $5000 of taxable income and nobody can claim the American opportunity credit. But if she reports $9000 as income on her return, the parents can claim $4000 of qualified expenses on their return.
**Even if she had less, she is allowed to file if he needs to get back income tax withholding. She cannot get back social security or Medicare tax withholding.
