Q. I earned almost $30,000 is scholarships and grants, do I have to pay taxes on that?
A. Yes. $16,000 (30,000 - 14,000 = 16,000) is taxable. Costs of books and other course materials, even a required computer can reduce that amount.
But, you actually may want to pay even more 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 $30,000 in box 5 of the 1098-T and $14,000 in box 1. At first glance he/she has $16,000 of taxable income and nobody can claim the American opportunity credit. But if she reports $20,000 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 $19,000 of taxable scholarship income, instead of $20,000.
