Q. I thought I should file a tax return for my daughter because of her scholarships?
A. No. Scholarships are only reportable if you know some of it is taxable. Even then, it does not need to be filed, if she is under the filing threshold (her standard deduction).*
Q. I read the taxable amount should be filed under her, not me?
A. That's correct.
Q. Can I count all $11,731 in Box 1 of 1098-T as Qualified Educational Expenses, even though only $6401 of it was for the Fall 2021 classes and the remainder ($5330) is for Spring 2022?
A. Yes. Under the rules, expenses for the first term of 2022, if actually paid in 2021, are eligible for 2021 tax attributes.
*There are times when you want the student to file a tax return, even when they technically don't have to, to document the reporting of scholarship income. The usual situation is this: the family didn't actually pay any tuition (because it was all paid by scholarship) but are otherwise eligible for the tuition credit. By the student declaring some of his scholarship as taxable, it frees up tuition for the parents to claim the credit. See explanation below the line. In your case, the taxable amount of scholarship is so small (if any) that going to the trouble of filing a tax return. documentation is not recommended.
Theoretically, TurboTax (TT) can calculate the taxable amount of her scholarship. In actuality, it's complicated, an it's best if you have some idea of the taxable amount before trying to enter it.
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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.
The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit". PUB 970 even has examples of how to do the “loop hole”.
