@john clay
you have scholarship income - that is taxable to you.
You have Qualified Educational Expenses (QEE) - that CAN BE used to reduce the scholarship income dollar for dollar. Youi don't have to unless the scholarship is "restricted"
Example:
Scholarship income: $3,000
QEE: $4,000
I can just report $1,000 of net QEE (and no scholarship income) and get the AOTC scholarship based on the $1,000.
but I have the option to break them out separately and report the $3000 of scholarship income (and pay the tax on that income as appropriate) and then report $4000 of QEE, which gets me a larger AOTC tax credit (in most cases).
That is totally permitted - with an exception.
If the scholarship is restricted in its use, then the scholarship must be netted against the QEE ("the expenses").
Let's say that my scholarships were two separate scholarships: one was for $2,000 and was restricted in its use solely for tuition. The other one was unrestricted and I could use it as I pleased.
Therefore, I have to net the $2,000 restricted scholarship against the $4000 of QEE, leaving me with $2,000 of QEE and scholarships of $1,000.
Since this last $1,000 is an unrestricted scholarship, I can report the $1,000 as income and use $2,000 of QEE to claim the AOTC tax credit. The result is my AOTC tax credit is limited compared to circumstances where the scholarship is unrestricted.
it's complicated.
on the MS HELP scholarship - that 'sounds' unrestricted, because you state it "may be used"; you didn't state it MUST BE used for tuition.
