Q. I glean from above that I could designate the entire scholarship amount as taxable.
A. Yes, assuming none of the scholarship is restricted. But, you need to decide how much to make taxable for the best tax benefit.
Q. In that case the “Report Educational Expenses and Benefits” would be (full scholarship amount) – (amount needed to get max AOTC credit)?
A. Yes, if you decide to make it all taxable.
Earlier you said you had $2500 of savings bond interest. Then you said you had Total Bond withdrawal of $13,000. 2500 / 13,000 = 19%. That means for every $100 of scholarship (over the standard deduction) that you declare taxable, only $19 of the interest will be excluded. Probably not a good trade off.
The same analysis is applied to the 529 distribution. Expenses allocated to the 529 / distribution = percentage of earnings that are tax free.
The simple math is make only enough scholarship taxable to get to the standard deduction (13,850).
