It takes $4000 of qualified expenses (tuition, fees, book) to get the maximum American Opportunity Credit (AOC).
So, you need to report $4000 of expenses on your return. You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.
Enter the 1098-T, exactly as received, on the student's return. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That makes $9514 taxable on her return (you may be able to reduce that by entering book expense). If that's her only income, she will not owe any tax
Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T on the student's return.
There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on her return, with 0 in box 1 and taxable amount ($9514) in box 5.
