As others have said, the education credit goes to the person claiming the student's exemption. So, the reay question is: can you claim an 18 year old with $40K income. Answer: probably.
There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
- He lived with the parent (including temporary absences such as away at school) for more than half the year
So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.
The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.
The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,400), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section. TT will check that box on form 1040.
You say he's getting a 1099-S. The amount on a 1099-S is not income; it's the gross sales amount (1099-S is for real estate sales). The income is the profit (capital gain) made on the sale. Furthermore, it's unusual for an 18 yr old dependent to be getting a 1099-S. Do you really mean a 1099-NEC or some other 1099 (1099-B is for stock or mutual fund sales, but, again the amount on a 1099-B is gross sales and not taxable gain.
