Carl, there's a scenario you answer doesn't address. I'm hoping you can clarify.
Pub 970 says you can count any portion of a scholarship as regular income, not just the amount in excess of tuition:
"You may be able to increase your American opportunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student's gross income...consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses."
For example, my daughter's 1090-T shows $9,000 in tuition and $18,000 in scholarships (yep, it's a nice scholarship). Pub 970 says she can choose to split that $18,000 as $5,000 covering qualified educational expenses, and $13,000 as taxable income used to pay non-qualifying expenses. That would leave an additional $4,000 in tuition that was not covered by the tax-free portion of the scholarship, which qualifies toward claiming the $2,500 American opportunity credit.
So here's the question: can the student still choose to split the scholarship between qualified and non-qualified expenses as described above, even if she will be claimed by me? And does this allow ME to claim the $2,500 credit?
