Families may be able to increase their total refund or reduce tax liability by paying some tax on their scholarships and increasing their tax credit. Students may choose whether to treat their scholarships as used for tuition and related fees (tax-free, but reduces expenses for credits) or as used for living expenses (taxable, but does not reduce expenses for credits). From The Interaction of Scholarships and Tax Credits. It is from 2014, but still valid and useful today. @jaybird84
You can split up the income and expenses (qualified and non-qualified) between your two returns. The IRS encourages this to maximize the education credits. See Examples for Pub 970 (2024).
Students may allocate scholarships to living expenses (up to the amount of actual living expenses). Students exercise their choice by deciding how much of their grant or scholarship income to exclude from their income, and what expenses to claim for the AOTC or LLC. See the last few slides of the IRS 2014 Slide Show for examples for each possible situation.
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