Question: Can my daughter report the $4000 as income on her tax return if she did not receive s Form W-2 or Form 1099-MISC reporting $4000 as income?
Answer: Yes, she can and must. The $4000 of taxable income can be reduced by any other fees or book costs not included in box 1 of the 1098-T.
Actually, you may want her to report more than $4000 of taxable scholarship. There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit (AOC or AOTC), 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 1. 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. $4000 is the maximum amount of expenses needed to claim the maximum AOC.
