Q. That doesn't say anything about scholarships that cover all room board?
Q That doesnt count as income? . . . . if its not income, then why would she need to pay taxes on it?
There are three different things going on here. They're intermingled, so, yes it is confusing.
1. Can the student qualify as independent? No. Scholarships are ignored in the support test. That is, they are not counted as support the student provided for himself. They're third party support.
2. Are scholarships earned income, for purposes of the student qualifying for the refundable portion of the AOTC. No, because it is not income earned from working.
3. Are scholarships taxable. Yes. The portion of scholarships that exceed qualified expenses (tuition, fees, books and course materials) is taxable. Essentially, scholarships for room & board are taxable*.
So, yes, what you're hoping for isn't going to work, even if the reasons aren't clear.
*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for the, AOTC rule, kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.
