Q. So I qualify for the Lifetime credit and Opportunity credit?
A. At first glance, No. You have no net qualifying expenses.
In fact, $8435 of your scholarship is taxable income.
But, there is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), 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 $15,482 in box 5 of the 1098-T and $7047 in box 1. At first glance he/she has $8435 of taxable income and nobody can claim the American opportunity credit. But if you report $12,435 as income on your return, you can claim $4000 of qualified expenses on your return.
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, you would only need to report $11,435 of taxable scholarship income, instead of $12,435.
You are limited to claiming the AOC four times, in your undergrad years. Any times your parents claimed it, when you were their dependent, count against those four times. It takes $10,000 (instead of $4000 for the AOC) of qualified expenses to get the maximum ($2000) Lifetime learning Credit (LLC). There is no limit to how many times the LLC can be claimed.
