Q. So I don't know if I even need to file Indiana tax return for him??
A. Yes, he does need to file because some of his scholarship is taxable at both the state and federal level.
Q. Does he pay it to Indiana or Ohio??
A. Only IN. Because of the reciprocal rule (and other rules) he does not need to file an OH return, unless you want to go to the trouble of getting the $6 OH withholding (w/h) back. If the OH w/h was in box 19 (instead of box 17) of the W-2, it was city w/h, not state, and you cannot get that refunded (the reciprocity rule doesn't apply to city tax). Your IN county may give you a credit for OH city tax paid.
Q. So it is obviously counting the $23K that's taxable from the 1098-T. Is this correct? He has to pay state tax on the 1098-T as well?
A. Yes, both state and federal tax scholarships used for room and board and misc expenses
Q, Does TurboTax (TT) software handle this calculation and I just have to print out the forms from the proper state and send them in?
A. Yes. At least theoretically. But the education interview is tricky and you should review and verify before filing (both state and federal). Rule of thumb: the difference between box 1 and box 5, of the 1098-T, is the taxable amount. But that can be reduce by the cost of books, fees and a required computer, not included in box 1.
Q. I did NOT put any information from his 1098-T on my federal taxes. Is it OK to do this way?
A. Simple answer: yes. Since all his "qualified" educational expenses (tuition, fees, books, required computer) are paid by the tax free portion of his scholarship, you usually cannot claim a tuition credit.
BUT
There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $37,500 in box 5 of the 1098-T and $14,500 in box 1. At first glance he has $23,000 of taxable income and nobody can claim the American opportunity credit. But if he reports $27,000 as income on his return, the parents can claim $4000 of qualified expenses on their return.
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, he would only need to report $26,000 of taxable scholarship income, instead of $27,000.
