Q. From my understanding, the extra money I had leftover does not have to be included in my taxable income because I used it towards qualified education expenses.
A. That is correct.
Q. When I file my taxes, how do I ensure that $492 I used on books is not included as taxable income?
A. Just don't enter the 1098-T since you know it all comes out even. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. Otherwise, follow the TT interview very carefully and enter you book expenses at the book screen.
That said, 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 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.
Caveat: A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. You usually must have actually paid tuition, not had it paid by scholarships & grants. It is usually best if the parent claims that credit.
