Q. Seems crazy! What am I missing?
A. What you are missing is that room and board are not "qualified" educational expenses (QEE). Scholarships that pay for QEE are tax free. Any additional scholarship amounts are taxable. The $15,000 taxable portion can be reduced a little by any book and computer expenses, not shown in box 1 of the 1098-T.
Q. Who claims the 1098-T?
A. Both of you. She enters it to pay tax on the excess scholarship. You enter it to claim the tuition credit (unless your income is too high to qualify). You actually want to increase her taxable scholarship to $19,000 to allow you to claim $4000 of QEE for the maximum credit (see "loop hole" explanation above). The credit is a maximum of $2500, so the family comes out ahead, even with her paying more tax.
The TurboTax (TT) interview, in both your return and hers can theoretically handle this, But it can get complicated and mistakes are frequent. The simple work around is you enter the 1098-T, on your return, with $4000 in box 1 and box 5 blank. On her return, she enters the 1098-T with 0 in box 1 and the calculated taxable amount in box 5 ($19,000 unless you can lower it with some book and computer expenses).
