One more issue to consider.
There is a tax
“loophole” available. The student reports all his scholarship, up to the amount
needed to claim the American opportunity credit, 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 $16,600 in box 5 of the 1098-T
and $10, 000 in box 2.
At first glance he/she has $6600 of taxable income and nobody can claim the American
opportunity credit. But if she reports $10,600 as income on her return, the
parents can claim $4000 of qualified expenses on their return.
She will pay about $400 more tax, but the parents will get $1000 to $2500 on their return.
