Q. So I would claim $7000 as taxable income on his taxes?
A. Yes. That would allow you to claim $4000 of tuition, on your return for the AOTC. The $7000 could be reduce by any book or computer cost he has.
Q. I was told by a supposed tax professional that he didn’t need to file taxes for the excess money?
A. That is also correct. Assuming the $7000 is his only income, it is less than the $14,600 filing requirement. So, he is not required to file a tax return. Even if he does, he will owe no tax. His standard deduction will wipe out the tax*. You may want him to file just to document him reporting the income, allowing you to use the "loop hole" to claim the AOTC.
Taxable scholarship is entered on line 8r of Schedule 1. The simple way to do that in TurboTax, is enter a 1098-T on his return with box1 blank and $7000 in box 5. The 1098-T he enters is not sent to the IRS, so there is no discrepancy. On your return, do something similar. Enter a 1098-T with $4000 in box 1 and box 5 blank.
The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit". PUB 970 even has examples of how to do the “loop hole”.
*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450. 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.
