Q. While Scholarship A is not applied to tuition on the billing statement it is in fact a tuition only scholarship. In this situation I don't think I can use the loop hole. Do you agree?
A. Yes. The rule is that the scholarship must not be restricted. That is, it is a condition the the money be used for tuition and other qualified expenses. If you know that to be the case, you cannot use the loop hole. On the other hand, you are not locked in by the school applying Scholarship B to tuition (on the invoice) if you know, for a fact, that the scholarship is unrestricted. They apparently made a mistake on Sch A, so it could be a mistake on Sch B too.
Q. The loop hole requires splitting the data on the 1098T between the parent and student's tax returns as shown?
A. Yes, but you do not have $2k income. Do not report any scholarship income on your return. See below for an alternate.
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. Enter book expenses separately. 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 will put all his excess scholarship as income on his return.
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
There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the taxable amount in box 5. In that case be sure the amount in the "Amount used to claim the tuition deduction or credit" box is 0.
