Q. Should he file a separate return for this 1098-T?
A. Simple answer: No.
The 1098-T is only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return.
Scholarships that pay for qualified expenses (tuition, fees, books and course materials, including a required computer) are tax free. Any excess is taxable income to the student. Your student potentially has $4000 (9700 - 5700) of taxable income. If that is only income, he does not need to file a tax return as his standard deduction* is more than that.
Since he is a dependent, he does not qualify for a tuition tax credit, so he has no reason to "file the 1098-T".
Q. Can you, the parent, claim a tuition credit?
A. Normally no, since his qualified expenses were covered by tax free schoalrship.
But, 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 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 $9700 in box 5 of the 1098-T and $5700 in box 1. At first glance he has $4000 of taxable income and nobody can claim the American opportunity credit (AOC). But if he reports $9700 as income on his return, the parents can claim $4000 of qualified expenses on their return. $4000 is the amount needed to get the maximum AOC.
Since $9700 is still less than his standard deduction*, he still does not technically need to file a tax return. But, you may want him to do so to document his reporting of the scholarship as income.
Books and a computer are also qualifying expenses for the AOC. Extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, he would only need to report $8700 of taxable scholarship income, instead of $9700.
*Note: Taxable scholarships is treated as earned income for purposes of calculating a dependent's standard deduction (earned income + $350).
