Most people subtract box 1 from box 5 and enter the difference as income, if Box 5 is MORE than box 1.
You do not report you student-dependent's scholarship income on your tax return. If she has any taxable scholarship income, it goes on her separate tax return. The full box 5 amount is not taxable. Only the amount that exceeds qualified expenses is taxable. Since box 1 (of the 1098-T) is all qualified expenses, the difference between box 1 and box 5 (if box 5 is more) is usually the taxable amount. You can usually reduce that amount by the cost of books and other required course materials. Scholataships that pay for Qualified educational expenses (tuition, fees, books and other required course materials is tax free. Scholarships that pay for room & board) are taxable.
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". There is a tax “loop hole” available. 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 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.
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 $5000 of taxable scholarship income.
