Q. Because the $26,500 is much greater than my income (~$6000) I fear that I lose the right to claim my child as a dependent nor can I claim Head of Household. Am I correct?
A. No. Scholarships are ignored in the dependent support calculation. "They just don't count".
He is still your dependent for all tax benefits, including HoH and EIC.
Q. I believe that the $26,500 ($41,000-$14,500) that was used for room and board is taxable income for my child, correct?
A. Yes.
Q. Does my child have to file a tax return showing $26,500 as income?
A. Yes
Q. What do I do with the Box 4 data?
A. You are expected to know what that is for. If you didn't claim a tuition credit on your 2023 return, it's unlikely to affect you.
From the form 1098-T instructions:
Box 4. Shows any adjustment made by an eligible educational institution for a prior
year for qualified tuition and related expenses that were reported on a prior year Form
1098-T. This amount may reduce any allowable education credit that you claimed for
the prior year (may result in an increase in tax liability for the year of the refund). See
“recapture” in the index to Pub. 970 to report a reduction in your education credit or
tuition and fees deduction
