Scholarships, grants and 529 funds have "always" counted as income *INITIALLY* and that hasn't changed. The taxability of that income is offset by the qualified education expenses they are used to pay for. Then, if there is any left over, it counts as taxable income TO THE STUDENT and the student will pay taxes on that excess at the parent's higher tax rate.
Would it be better for my daughter to file for herself, and us not claim her?
Absolutely not. Your daughter will not get anywhere even close to the education deductions and credits that you as the parent will get. Also, if you don't claim her, that changes nothing for your daughter. If you just *QUALIFY* to claim her as your dependent, then your daughter must select the option for "I can be claimed on someone else's tax return." It doesn't matter if you actually claim her or not.
When it comes to claiming the student dependent the parents' have a choice. But the student has NO CHOICE, and must select the option for "I can be claimed..." no matter what the parent's do. Keep in mind that there is no requirement for he parent's to provide the student any support...not one penny. THe support requirement is on the student, and only the student.
Grants, scholarships, 529 funds, gifts from Aunt Mary, etc., do not count for the student providing their own support. The student must have "earned" income that they earned in the same tax year, and the student must have provided more than 50% of their own support with that earned income.
So in your case, if your daughter has a full scholarship, it's perfectly possible for her to earn a million dollars and still *NOT* provide more than 50% of her own support.
