Room and board is more than the amount in box 1 of the 1099-Q. So none of the 1099-Q is taxable. So delete the 1099-Q, it does not need to be entered. You're also spared the chore of calculating the earnings portion of the distribution (0 in box 2 does not, usually, really mean 0)
Yes the computer counts since it was bought in the same year as college started. I'll use $800 for purposes of the math.
$5784 Tuition and fees
+ 1193 Books and computers
= 6987 Total qualified expenses (room & board don't count for credits & tax free scholarship)
- 4000 Used by the parents to claim the American Opportunity Credit
= 2987 Can be covered by tax free scholarship
- 5000 Total Scholarship received
= $2013 Taxable scholarship to be reported by student on his return. None will actually be taxed since his total income is less than $12,400 *
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.
*note: the student with unearned unemployment will not get a full $12,400 standard deduction. But, reporting taxable scholarship is usually the best technique (instead of reporting some of the 1099-Q as taxable). The "kiddie tax" may kick in
