Last example: $7335 + $686 + Board allowance - $7545 (used for 1099-Q) = amount available for AOTC.
Let's use $3000 as the board allowance. I'll put these numbers in the same format as the first example.
$11,021 in educational expenses(i7335 + 686 +3000)
-$0 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit
=$7021 Can be used against the 1099-Q
Box 1 of the 1099-Q is $7545
Box 2 is $3087
7021/7545=93% of the earnings are tax free
93% x 3087 = $2873
You have $214 of taxable income (3087-2873)
TurboTax can handle this, but you have to enter the numbers correctly. In fact, it's the scholarship part that makes it difficult. With no scholarships, your situation is straight forward.
But, you are right there is a sort-of glitch in TurboTax. It will assign all the available expenses to the tuition credit; then present you with a screen titled “Amount Used to Calculate Education Deduction or Credit” You have to know to change that amount to $4000 (there is an explanation and instructions on that page).
