Q. How does the student declare more income (the $6000. in your example)? The only form she gets is the 1098-T ?
A. Room and board are not qualified expenses for tax free scholarship (tuition, fees, books an a computer are). In the TurboTax interview, after entering the 1098-T, you designate how much of the scholarship will be allocated to R&B, to free up some of tuition, in box 1, to be allocated to the credit. It gets complicated. A work around is to manually calculate the amount of taxable scholarship ($6000 in the example) and enter the 1098-T with 0 in box 1 and $6000 in box 5.
Q. She is not a dependent on her parent's return, so how do they become eligible?
A. Why is she not a dependent. Most college age students are. Have they just elected not to claim her. If she meets the rules for being a dependent, she is not allowed to claim herself. They don't have to claim her, but she can not claim independent.
There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
- He lived with the parent (including temporary absences such as away at school) for more than half the year
So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on himself.
With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, she only qualifies for an education credit, if she is not a dependent. There are restrictions on a student, under 24, getting any of the refundable portion of the American Opportunity Credit.
See full dependent rules at: https://turbotax.intuit.com/tax-tools/tax-tips/Family/Rules-for-Claiming-a-Dependent-on-Your-Tax-Ret...
