Q. This (Iowa's approach) just strikes me as strange.
A. It's frequently done that. I'd say more often than not.
Q. They have reported it as a scholarship, which I assume will affect the equation for education credits.
A. No. Because it is being reported as income, on your son's return, it is not tax free scholarship. So it does count against the education credit. You do not report the UI 1098-T on your return.
Q. The way they have done this is most likely to hurt me rather than helping him. If it were regular income for him, he wouldn't even have to report it.
A. Just the opposite. As scholarship, rather than wages, he pays no FICA tax. As explained above, you still get the tuition credit.
