Q. Do taxes have to be paid on that $2900 scholarship considering her presidential scholarship awarded her that to cover the cost of the dorm?
We need to re-word the question.
Q. Is that $2900 considered taxable income, because it was used for non qualified expenses ("room"), even though the school paid for it.
A Yes. The fact that it was reported in box 5, of the 1098-T, confirms it as so. But it will probably not get taxed, unless she has sufficient other income. Taxable scholarship is treated as "earned income" for purposes of calculating a student-dependent's standard deduction (earned income + $400) and her filing requirement. If that is her only income, she does not even have to file a tax return.
