Theoretically you enter the 1098-T and then you follow the TT interview and enter your other expenses and adjustments and TT calculates the credit for you and the taxable scholarship for her. But it's complicated and mistakes do happen.
Easier way, just change the boxes to what they should be, The 1098-T, you enter, is not sent to the IRS. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.
On your return, enter $1750 in box 1 (add any book and computer costs you paid) and 0 in box 5.
On her return enter 18230 (19980 - 1750) in box 1 and 29,250 in box 5.
But, be aware, there is a tax “loop hole” available to get the full $2500 tax credit. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), 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 your numbers: Student has $29250 in box 5 of the 1098-T and $19980 in box 1. At first glance he/she has $9270 of taxable income and nobody can claim the American opportunity credit. But if she reports $13270 as income on her return, the parents can claim $4000 (the max needed) of qualified expenses on their return.
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $12270 of taxable scholarship income.
To use the loop hole, 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.
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.
