@xmasbaby0 said: "So that you know-----what is at stake is a non-refundable $500 credit for other dependents , and maybe...earned income credit."
There may also be a tuition credit available of up to $2500. It somewhat depends on what the "financial aid" is, loans or scholarships. Even if it's scholarships, there is a "loop hole" available to still be able to claim the credit. Students are generally not eligible for this credit. It's best claimed by the parents (or aunt/uncle) who claim them as a dependent. There is an income limit ($180K, phase out starting at $160K). The student must be half time or more. See below for details.
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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 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 $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her 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, she would only need to report $5000 of taxable scholarship income, instead of $6000.
If the student's total taxable scholarship (and other income) is less than $13,850, he will pay not tax.
