The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income.
You claim the tuition credit, and/or report scholarship income, based on your own financial records, not the 1098-T.
This means you adjust the qualified expenses, to allocate them as needed (and as allowed).
Since Box1 of the 1098-T is $10,141 and Box5 is $14,254, at first glance, you cannot claim a tuition credit because all the qualified expenses were covered by scholarship and the student must report $4113 of scholarship as taxable.
But here 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 your numbers: Student has $14,254 in box 5 of the 1098-T and $10,141 in box 1. At first glance he/she has $4113 of taxable income and nobody can claim the American opportunity credit (AOTC). But if she reports $8113 as income on her return, the parents can claim $4000 (the amount needed to maximize the AOTC) of qualified expenses on their return. $4000 of expenses gets you $2500 credit.
Books and computers are also qualifying expenses for the AOTC. 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 $7113of taxable scholarship income, instead of $8113.
It is not an option to report her income on your return (as apparently TT suggested). TT will automatically generate form 8615 if needed, on her return.
________________________________________________________________________________________
You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter in TT is not sent to the IRS.
Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.
Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s interview. Check the student information work sheet (part VI, line 17) to verify it was entered. If not, the alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T.
There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the taxable amount in box 5. Don't enter any other amounts.
