Yes. Because he received more in scholarship than what the school is reporting as qualified expenses, the remaining portion of the scholarship becomes taxable. This does not affect his Federal Return: His Standard Deduction of 12,000 reduces the taxable income down to zero and he has no tax. However, Indiana only exempts $1,000 of income, and he must pay both state and local tax on the additional income being reported.
If you have other qualifying educational expenses that you can claim (books, equipment, materials, etc.), this will reduce the taxable amount being reported. But this now taxable income will increase the Indiana tax due.
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