Tax Year Prior to 2020: Scholarship amount exceeds tuition.

We are having a problem with TT taking our tuition tax credit to 0 due to scholarships exceeding the tuition reported.  I know why this is happening, just not what to do about it.

Our 22 year old son (who is a dependent for tax purposes) was an aviation student from a local technical college.  This is their most expensive program and tuition expenses for 2018 were over $36k; scholarships that year were a little over $5.2K.  Obviously, we topped out on the American Opportunity and the scholarships were not really an issue.

In 2019, he graduated with an Associates Degree.  He then moved on to our local state university and continued his education as a half-time student.  He did have five months as a fulltime student, and he should have had a semester’s ($18k) worth of tuition.  However, when our 1098Ts arrived, they only showed a total of $2,869 tuition, but with a total of $4,220 scholarships.  Hence, the $0 tax credit.

By the way, when I mistakenly posted elsewhere (they suggested that I make a new post), the question come up about whether we had a 529.  There is no 529 involved here.

He actually paid out $18k for the Spring 2019 semester, but I’m guessing that got put into 2018.  Either because that’s when it got paid, or perhaps that’s when the student loan went in.

TT correctly said that the excess scholarship money would become taxable income to our son. He will have w2 income and would have to file anyway. 

In looking at https://ttlc.intuit.com/community/taxes/discussion/i-claim-my-son-as-a-dependent-he-has-a-taxable-sc... ( I mistakenly put a reply there and it really didn’t fit, so I am posting fresh here)

I found a post by woodlore in which they quote Pub 970 and I quote in part;” Publication 970 for 2015, in two separate sections discussing coordination with Pell grants and other scholarships (pages 15 and 26), suggests "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."  Also this: "Thus, including enough scholarship or fellowship grant in the student's income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income."

I figured out how to enter it as non-qualified on his taxes, (answer "Yes" to the question about paying room and board with a scholarship and put $4,220 in).  And it seems that I would do the same on my taxes in TT.

My questions are this:

• Can I make the scholarship as paying non-qualified expenses? I seem to recall a previous tax preparer asking this type of question about our oldest son when he was in college.  And how do I know if the scholarship/grant can cover room and board?
• Do I need to substantiate the conversion to non-qualified expenses? If so, how?  He didn’t stay in the dorm, but lived with us.  So there isn’t a statement from the school for room and board.
• Assuming that I _can_ do this, am I doing it correctly in TT?
• Would doing this trigger some kind of action by the IRS.
• Lastly, in regards to the Spring 2019 tuition somehow having been paid in 2018, is there some way to make that change so that tuition exceeds the scholarships. I also saw something somewhere that a scholarship could be somehow applied to a previous year, if it was supposed to be for the previous year expenses.  But how would one do that?

I’m sorry for the length of this, but this became complicated really quick.  I’ve been totally blind-sided by this and I didn’t account for it in our estimated payments, so if I can’t figure this out, we’re on the hook for $2,500.00

Thank you for any help that you can give.