Q. How do you go about reporting the additional $4,000 of Income on the daughter's return?
A. When asked if any of the scholarship paid for room & board, in the education interview, answer yes. When asked how much, enter $6000. To make some of the scholarship taxable (re-allocate some of the expenses), you must tell TT how much you want taxable by saying it was used for room &board (room & board are not qualified expenses for a scholarship to be tax free). Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.
Q. Where would you add the additional $4,000 for the "loophole" (on the parent's return)?
A. Essentially the same way. The way you enter this in TurboTax (TT), when asked if any of the scholarship paid for room & board, in the parent’s interview, enter $6000. TT will tell you that the student will need to report the income on her return.
That's the official way. There's an easier way by using a workaround. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter, in TT, is not sent to the IRS.
On her return, manually calculate the taxable amount of scholarship and enter the 1098-T, on her return, with 0 in box 1 and the taxable amount ($6000) in box 5.
