Q. Firstly, do I have to pay for this tax form, and if so, how much?
A. You can't use the free edition. The upgrade is $39.99.
Q. What amount do I need to pay tax on.?
A. Simple answer $11,500 (15000 - 3500). But maybe nothing and could be more.
Scholarships that pay for qualified educational expenses (QEE - tuition, fees, books and other course materials) is tax free. Scholarship amounts that exceed QEE is taxable income, on the student’s tax return.
If box 5 of the 1098-T exceeds box 1, TurboTax (TT) will treat the difference as taxable income, unless you enter additional QEE at books and other expenses. Room and board are not qualified expenses.
If you have no other income, the scholarship will not get taxed, as you are allowed to deduct the (up to) $13,850* standard deduction. If that is only income, you do not even need to file a tax return.
If you are your parent's dependent, they will, most likely, want to claim the tuition credit by using the $3500 in box 1 (plus any books and a required computer) as QEE**. In that case, you will report the whole $15,000 as income and pay a little tax on the amount over $13,850 (about $115 tax).
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*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 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.
**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, instead of $6000.
