Q(1) How can I do the tax loophole correctly?
A(1) Use the short cuts and don't get bogged down in the interview. See Q2 & Q3.
Q(2) What amounts need to be entered on his return for Box 1 and Box 5?
A(2) 0 in box 1 and $13,279 in box 5 (20804 -11116 - 409 + 4000 = 13,279)
Q(3) What amounts need to be entered on our return for Box 1 and Box 5?
A94) 4000 in box 1; 0 in box 5
Q(4) How do I then answer the TT interview questions correctly?
A(4) Enter no other numbers. Yes, he's working on a degree. Full time student. No to books or loan payments. No to scholarships. No to 4years of college. Last three questions answer based on your facts.
Q(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?
A(5) It is not entered any where. It's included in the $4000 that is no longer covered by tax free scholarship. You never enter payments, per se. You enter expenses only and then allocated them to the tax attributes (scholarship, tuition credit, 529 distribution). Notice that there's no where to enter student loan payments either.
Q (5b) Do I use this amount ($2809) instead of the $4,000?
A(5b) No.
Q(6) Should I claim him as a dependent?
A(6) Yes. Everything you described says he's still your dependent. Equally important nothing you described qualifies him for any AOTC, if he isn't your dependent.
Q(7) Should he file stating he can be claimed as a dependent but is not being claimed as a dependent?
A(7) No. He states he can be claimed as a dependent and will be claimed as a dependent
With his wage income, he will exceed the filing requirement and report $16,088 of income (13,279 scholarships + 2,809 wages). $16,088 -14,600 standard deduction = $1488 taxable income x 12% =$179 tax, allowing you to claim the $2500 AOTC. The "kiddie tax" will apply. I assume the parents marginal tax rate is 12%.
Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450). It is not earned income for the kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.
Taxable scholarship goes on line 8r of Schedule 1.
