Q. How do I then adjust the numbers on the 1098-T listed on my return?
A. Delete the 1098-T. You do not enter the 1098-T on your return, at all, since you are not eligible for the AOTC due to income being too high.
Q. Am I correct that she can claim up to $4000 on her return?
A. Yes, but only if you do not claim her as a dependent. Her other income would have to be more than $14,600, if it is from working, before the AOTC would do her any good. If she has investment or other unearned income, the filing threshold is only $1300.
While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out. A full time student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support. It is usually best if the parent claims that credit.
If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit. The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)
Note: Room and board is not properly reported in box 1 of the 1098-T. But, schools have been known to mistakenly do so. Room & board is not a qualified expense for the AOTC.
