Q. So for the mother's return, I deduct the $25k from the data I put in for the 1098-T?
A. No. $32K - 25K = 7K, which will be offset by the $7K scholarship in box 5 and the parent will not get the tuition credit.
You assemble your other expenses: room and board, books and a computer. If your student lived off campus (even at home) you can use the lower of your actual room & board expenses or the school's allowance for on campus students.
Unless the mother's income is too high to qualify, for the credit, she uses $4000 of the tuition to claim the American Opportunity credit (AOTC).
$32,000-4000 (AOTC) -7000 (scholarship) = 21,000 of tuition can be used for the ESA. You only need $4000 more expenses (R&B etc) for the ESA distribution to be tax free. Knowing what college costs, you surely have that much. Do not enter the 1099-Q in TT, on either the parent or student's return. You know that none of it is taxable.
On the parent's return, you can enter the 1098-T exactly as received (since you know it's covered) or subtract $21K (used for the ESA) from box 1 or enter it with $4000 in box 1 and 0 in box 5.
The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income.
If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)
You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. .
Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.
