Get your taxes done using TurboTax

First of all, an education credit can be valuable. If an education credit can be taken, it is taken by the Taxpayer that claims the student.

When a student is away at school, that is the same as living at home when determining if the student is a dependent. As long as the student does not supply more than half their own support, they are a dependent.

You don't have any 529 education savings distributions (Form 1099-Q) so we are only dealing with Scholarships. 

Yes, usually it is advantageous to take 4,000 education expenses and apply that towards a credit. 

Yes, you are allowed to "move" expenses and scholarships, but you can't just make things up. 

Scholarships can be ALOCATED to different expenses, such as tuition or room and board. 

Your 1098-T is reporting that tuition paid for 2024 was 11,116 and that the student received scholarships in the amount of 20,804. 

(Compare this to the student school statement to verify that these amounts are correct)

So with these numbers, the 1098-T is showing that the student received 9,688 more in scholarships than what he paid for tuition. 

If he also paid 409 for books (which would not be listed in Box 1 on the 1098T) the scholarship is 9,279 over. 

Scholarships used to pay tuition are not taxable.

Scholarships used to pay room and board ARE taxable.

You have the right to allocate the scholarship either way. (because the scholarship was not restricted to tuition only) 

If you ALLOCATE 4,000 of the tuition expenses to go towards a education credit, the student would need to claim an additional 4,000 in scholarships, so in your case 13,279 ( 9,279 + 4,000). 

With his wage income, he would need to file and claim 16,088 income (13,279 scholarships and 2,809 wages) 

The tax on his income of 16,088 would probable be less than the education credit you would get, so it is probably beneficial for you to claim the credit this way. 

(1)  How can I do the tax loophole correctly?

     The program will try to get you the credit. The student is your dependent so you should enter the 1098-T into your TurboTax program, and continue through the interview. Be sure to enter the additional expenses such as Books and Supplies. Was he required to have internet service to do any online classes or homework? If yes, a potion of that expense can be included. Room and Board are NOT included as education expenses for the credit. 

     At the end of the interview the program will give you an option to "Maximize my tax break". When you select this, the program will likely suggest the student claim income so that you can claim 4,000 expenses for the American Opportunity Tax Credit. (other restrictions may apply, such as your income)

     In your situation, the scholarship income the student will need to claim should be around 13,279.

(2)  What amounts need to be entered on his return for Box 1 and Box 5?

     Do not alter the 1098-T if the numbers are correct. Enter the form as it was reported to you. If the numbers are WRONG, you can adjust by using the link under Box 1 "What if this is not what I paid?" This might occur if a scholarship crossed a calendar year or the student received a refund from a class. 

(3)  What amounts need to be entered on our return for Box 1 and Box 5?

     Again, you are not altering the 1098-T, only allocating some of the amount in Box 5 to the student which the TurboTax program should do for you. If you were doing this on paper you would allocate part of Box 5 by 4,000 and have the student claim that EXTRA 4,000, but when using TurboTax, you don't do that, the program should. 

(4)  How do I then answer the TT interview questions correctly?

     The program will ask about any other expenses and you will enter the amount spent on books and supplies. There will also be questions asked in regards to the credit. The credit can only be claimed four times per student. The student is in the first four years of the degree (for 2024) as long as the student had not graduated with a Bachelor's degree in 2023 or before.  

(5) How do I address the $2,809.45 that he paid in cash for expenses after scholarships covered the rest that is not listed on the Form-1098? Do I use this amount instead of the $4,000?

     The out of pocket payment will not be addressed. You only report what was paid and how much scholarship was received, the program does the math. 

(6)  Should I claim him as a dependent?

     YES, from what you say, I believe he is your dependent. You can verify this by entering his information into your "Personal Info" section and the program will tell you if he is your dependent. The time a student is away at school is considered as time living at home.

(7)  Should he file stating he can be claimed as a dependent but is not being claimed as a dependent?

     NO.  There are situations where an education credit can be obtained, but the Parent/Taxpayer that can claim the student can't use the credit (because of income limitations). If the student has a large tax liability it might be advantageous for the parent to not claim the dependent student and let the student claim the "NON-REFUNDABLE" portion to lower his tax liability, but this is not the case in your situation. 

     He will need to file a federal tax return as a dependent and claim his wages and the scholarship income on his return. 

     If he needs to file a state return, he would file as a resident for the state in which you live. He may also need to file as a non-resident for the state in which he earned the income. 

IRS Pub 970 has some great information and examples that you might find helpful

@Momof2boyz