"So if the second one which does have scholarships more than tuition ($12000 tuition and box 5 is $19500) enters on his return he should pay tax $170."
No. 19,500 - 12,000 + 4200 = $11,700. But $11,700 is only his reportable income, not his taxable income. He gets a standard deduction of up to $14,600. So he pays no tax.
Now we're going to add $3340 (4000-660 =3340) more taxable scholarship, so that you can claim $4000 of expenses for the full $2500 AOTC. $11,700 + 3340 = $15,040 reportable income - $14,600 Std deduction = $440 taxable income.
So, how do you enter that? You use a workaround. You enter the 1098-T from the 2nd school (but not both), but you enter $4000 in box 1 and nothing in box 5 (this is allowed! What you enter is not sent to the IRS*).
On his return, he enters both of them and follows the interview. In particular, be on the lookout for a screen “education expenses used for a tax credit”. It will usually be prepopulated. You can change it, if needed, for the amount you want to allocate to the AOTC, $4000 in your case.
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.
Taxable scholarship goes on line 8r of Schedule 1
*The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. In your case, both!
If you claim the tuition credit, you do need to report that you got one.
You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid.
Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show and/or what you need to enter to accomplish the proper reporting for tax purposes. 1098-T that you enter in TT is not sent to the IRS.
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