Q. Is that ok to claim that I spend $4,000 out of pocket on food and other expenses while he was studying from home to claim the American Opportunity Tax credit?
A. Simple answer: Yes, to getTurboTax to do what you want.
But, that's not what's really happening. It doesn't really matter if you "spent" anything. All that matters is that $4000 of qualifed expenses was not covered by tax free scholarship.
Taking the above example a step further. Student has $10,000 in box 5 of the 1098-T and $8000 in box 1 (tuition), and no other expenses to enter. After entering the 1098-T, you will be asked if any of the scholarship was used for room & board. Answer yes. When asked how much was used for R&B, answer $6000. That will free up $4000 of tuition to be used for the AOC*. TurboTax claims the AOC, automatically, based on those simple entries. The student reports $6000 of taxable income on his return.**
*$10,000 scholarship minus $6000 allocated to R&B = $4000 scholarship allocated to tuition.
$8000 Tuition (box 1) minus $4000 coverd by tax free scholarship = $4000 tuition can be claimed for the AOC
**Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,400 filing requirement and the dependent standard deduction calculation (earned income + $350).. It is not earned income for the kiddie tax and other purposes (EIC, IRA contributions, etc). So, if that $6000 is the student's only income, not tax will be due. He does not even need to file a tax return. But, you may want him to do so to document that he reported the income.
