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The IRS allows you to move around how the scholarship was used. If you claimed it went to room and board rather than tuition, you would have spent more on tuition. The student has to claim the small difference as income and may be subject to the kiddie tax but it is usually well worth it for the parent to claim the education credit.
The IRS has a great brochure that explains how scholarships and tax credits interact.
You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for educational credits or deductions, including the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC).
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Reference: What is the Kiddie Tax?
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 $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their 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, she would only need to report $5000 of taxable scholarship income, instead of $6000.
Q. I submitted my dependent's 1098-T that shows a higher amount for scholarships/grants that for payments received yet TurboTax found I qualified these credits?
A. You most likely told TT that you used some of the scholarship for room & board. That re-allocated some of the tuition from scholarship to AOC.
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