Q. Should she file her own return with this, or can it be added to our return since she is still a dependent and this is her only income?
A. Because of the type of income, she must file tis on her own return. But it turns out, that's a good thing.
Q. Since she will be taxed at our rate I'm not sure what the difference is?
A. She gets a $13,850 deduction before tax kicks in.
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.
