Should an AOC credit be granted if the amount of scholarship income reported equals qualified expenses reported? Per the IRS, no. Per TurboTax, yes. IRS Pub970, pg 14.

[maglib]

This is because the way you entered the amounts, or didn't change the defaults.  TT assumes that some of your education expenses will be used for education credits, you had the ability to change that amount in the interview. In the education interview, when you get to the screen that says “Here’s your Education Summary”.  Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

Basically, you selected to create a portion of your scholarship to be taxable income.  "However, a scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income".  Since you included it in income, it became taxable, although you owe no taxes on it due to the standard deduction.  Ultimately getting the AOTC.  Ex. If you had $15k in education expenses $10k room and board and a $25k scholarship.  The interview asks you the amount of the scholarship for room and board making the $10k taxable income, giving you taxable income to get the AOTC.  It further defaults $xk to be used for education unless you change that amount used to calculate the education deduction or credit to a lower number (make it $4k to get maximum AOTC).

Do note that not all scholarships can be used this way and you would have to know the terms of your specific scholarship to decide if an amount can be  used for other personal school expenses. All amounts entered in the interview for room & board use become taxable.  See example of Indian scholarship can NOT be used this way in Publication 970.

I hope that makes sense.  See the examples on page 15-17 to see more examples of how you can in fact get AOTC when you make a portion of scholarships taxable. https://www.irs.gov/pub/irs-pdf/p970.pdf

In the publication 970 page 14 see the tip:  You may be able to increase the combined value of an education credit if the student includes some or all of a scholarship or fellowship grant in income in the year it is received. For examples, see Coordination with Pell grants and other scholarships, later. 

[rich-maris]

In my TurboTax Self-Employed version, the question "Amount Used to Calculate Education Deduction or Credit” did not pop up. I worked through the Edit prompts on all 4 options (Tuition, Other Education Expenses, Scholarships/Grants, and Education Information).
Thanks for your help.

[maglib]

The education forms are: tuition summary, 1098-t wks, Form 8863 (education credits), Form 8917 (tuition & fees deduction), and student info wk.  depending which credit that box may not be needed.
 Most SU's use desktop version of turbotax.  I highly recommend you think about using it in the future as it has drill down functionality and ability to see all forms and how amounts interact, you can edit amounts directly in the support forms. Also desktop allows you to prepare unlimited tax returns, e-file up to 5 returns (limit imposed by IRS). You do pay for each state filing. Most people save money using it when they are preparing multiple family members returns.

[maglib]

see edits what does the tuition summary say, part III? Did you have any of the scholarship taxed on the 1040?

[rich-maris]

Using online version (mistake) - already paid.  I looked for a prompt after the "maximize..." and nothing there. Thanks for the help.

[maglib]

<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/replies/3302260">https://ttlc.intuit.com/replies/3302260</a> if you want to switch to desktop, you would have to Contact TT support though to get a credit towards what you paid for online version to switch to desktop <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/users/32163141">https://ttlc.intuit.com/users/32163141</a>  .  Maybe next year.

[rich-maris]

Scholarship was correctly taxed on son's return. Yep, next year.