Simple answer: yes. Since your grants exceed your qualified
expenses, you have taxable scholarship income.
Unfortunately, taxes aren’t simple.
First, if you have less than $12,000 of income**, including
the taxable portion of the scholarship, you do not need to file a tax return,
so none of it will actually be taxed.
Books and other course materials, not shown in box 1 of the 1098-T will further reduce the taxable amount
Second, 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 (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 $10,000 in box 5 of the 1098-T and
$8000 in box 2.
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. If you use this technique, both the parents and the students "enter" the 1098-T, with some adjustments.
**If you have investment income (interest, dividends and capital gains) of more than $350 and total income of more than $1050, you still have to file, even if your total income is less than $12,000; although little or no tax will be owed.
