Q. Can we leave them blank or should we manually input the parent’s income information?
A. Neither. TurboTax (TT) should populate them, as they are required. Try deleting the 1098-T and re-entering. You can made manual entries in the download versions of TT (but not online versions). But, when you do, you will be prevented from e-filing.
Q. We (parents) are hoping to claim educational credit.
A. Yes, that is allowed.
There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the conditions of the grant are that it be used to pay for qualified expenses.
Using your numbers as an example: Student has $10,000 in box 5 of the 1098-T and $7000 in box 1. At first glance he/she has $3000 of taxable income and nobody can claim the American opportunity credit. But if she reports $7000 as income on her return (essentially allocating $4000 of scholarship to room& board) , the parents can claim $4000 of qualified expenses on their return. Note you don't have to allocate the whole $8000 R&B you actually paid).
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. She would only need to report $6000 of taxable scholarship income, instead of $7000.
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, but not more than $14,600). 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.
