@NikM
Facts: 1098-T box 1 - $9,700 (Qualified Tuition) and Box 5 $18,300
You can add the cost of books and a required computer to the tuition as qualified expenses. For purposes of doing an example, I'll assume $800 more for total qualified expenses of $10,500
Q. How do you go about claiming the AOTC on your tax return?
A. You claim $4000 of qualified expenses, on your return, for the AOTC. For simplicity, enter (on your return) a 1098-T with $4000 in box 1 and box 5 blank. Those are the only numeric entries you need to make, in the TT interview (there are other qualifying questions)
That means the student has $4000 less expenses to allocate to the scholarship. $18,300 - 10,500 + 4000 = $11,800 of the scholarship is taxable. Assuming he has no other income, that is less than the $13,850 filing requirement*, so he does not even have to file a federal tax return.
Q. Michigan has a lower filing requirement. Does that means he should file a federal tax return, as well if he has to file state tax return?
A. No.
Q. Even if we had practically no out of pocket qualified expenses, is it okay to claim AOTC (as you confirm via above example/IRS guidance)?
A. Yes. As explained above, the IRS encourages this. Although not necessary, some advisors recommend that the student file a federal return, even when not required to document the reporting of the scholarship as income. The simple way to do this: he enters a 1098-T with 0 in box 1 and $11,800 in box 5. Enter no other numbers.
Q. I assume IRS receives copies of 1098-T so I wonder if changing the $ figures will be against the law?
A. No. You are adjusting numbers to facilitate the calculations. What you enter, in TT, is not sent to the IRS. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.
*Dependents have a filing requirement of only $1250 (not $13,850 for non dependents) or their earned income + $400 (up to $13,850). Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for other purposes.
