google IRS publication 970 and look at the chart on page 13.
the 2nd to the last box asks "Were the same expenses paid entirely with a tax-free scholarship, grant, or employer-provided educational assistance?" if the answer is yes, you'll note the chart takes you to "you can't claim AOTC"
so whatever expenses (Box 1 and other related fees such as the $1200 you note) are paid for by the scholarship are not eligible for AOTC. And since Box 5 exceeds Box 1 plus the $1200, there is no AOTC benefit.
her reportable income is $1600. Remember, that scholarship is already a benefit (you are not asked to pay tax on that income as long as it was used for qualified college expenses) and the federal government isn't in the practice of letting citizens take two benefits for the price of one.
You just can't "willy nilly" move the scholarship dollars around to create an AOTC benefit. I know there are threads suggesting there is a workaround, but I have not seem anyone explain how to legally circumvent the requirements of the chart I note above.
