No, we are not saying her income goes on your return. KrisD15 and I agree that the scholarship income must be reported on her (the student) tax return. What we disagree on is where it can or should be entered, in the TurboTax (TT) program. If you enter it in the wage and income section, TT will not place the SCH code on the dotted line at line 1 of form 1040. Income on line 1 without a W-2 or a dotted line code is a red flag.
She does need to file her own federal return. Since she is your dependent, she needs to file in your home state. She does not need to file a state return for the state where the school is located. Scholarship income (since it is unearned) is not subject to tax in the school location state (job income would be). If you decide to enter it in the wages section (rather than in education/scholarship) then a school state return is (probably) also required.
