Yes, you can claim a tuition credit, on your return, since she is your dependent. To keep it simple, just enter $4000 of tuition, on your return (the amount needed to get the maximum $2500 American Opportunity credit).
In TurboTax (TT), enter at:
Federal Taxes Tab (Personal for H&B version)
Deductions & Credits
-Scroll down to:
--Education
--Education Expenses
Answer no to "did you get a 1098-T", but indicate you qualify for an exception. You will be allowed to enter tuition.
She will need to file an amended return, reporting $4000 more of her scholarship as taxable. She should have already reported $1326 as taxable (13,750 -11,346 - 1078 = 1326). Room and board are not qualified expenses for tax free scholarship or the tuition credit. A required computer is a qualified expense.
Enter the 1098-T, exactly as received, on the student's return. Enter book expenses separately. In his/her 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 . 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. In that case be sure the amount in the "Amount used to claim the tuition deduction or credit" (if it shows up) box is 0.
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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.
