After you enter all the tax documents on your daughter's return, go back to the "Education Section"
Click Federal
Click Deductions & Credits
Scroll down to "Education" and click open Expenses and Scholarships (Form 1098-T)
Click Edit next to the student's name
This takes you to the "Here's Your Education Summary" page
Click Continue at the bottom of this page
This takes you to "Your education Expenses Summary" page
Click Continue at the bottom of this page
On the next screen, click "Maximize My Education Tax Break" at the bottom of the page
Continue until you see the results
The program will use the education expenses towards a credit and claim scholarship as income if the tax on the additional income is less than the credit.
You can change this by typing letme into the search box and then clicking the "Jump to letme" link
On the page that opens, you can change, or opt out of, any education credit you are eligible for. You can see how each change impacts the return.
As an additional note, in your situation, be aware that the 34,000 is only counted towards her support (and whether you claim her) if it was paid to her for services she performed. If the Fellowship was an award, it does not count towards her support.
According to the IRS:
"Earned income. Earned income includes wages, salaries,
professional fees, and other payments received for personal services actually
performed. Earned income includes the part of any scholarship or fellowship
grant that represents payment for teaching, research, or other services
performed by the student that are required as a condition for receiving the
scholarship or fellowship grant. Earned income doesn't include that part of the
compensation for personal services rendered to a corporation which represents a
distribution of earnings or profits rather than a reasonable allowance as
compensation for the personal services actually rendered.
If you are a sole proprietor or a partner in a trade or
business in which both personal services and capital are material
income-producing factors, earned income also includes a reasonable allowance
for compensation for personal services, but not more than 30% of your share of
the net profits from that trade or business (after subtracting the deduction
for one-half of self-employment tax). However, if capital isn't an
income-producing factor and your personal services produced the business
income, the 30% limit doesn't apply.
Support. Your support includes food, shelter,
clothing, medical and dental care, education, and the like. Generally, the
amount of the item of support will be the amount of expenses incurred by the
one furnishing such item. If the item of support is in the form of property or
lodging, measure the amount of such item of support by its fair market value.
However, a scholarship received by you isn't considered support if you are a
full-time student. See Pub. 501 for details."
