Student has $25,868 in box 5 of the 1098-T and $16893 in box 1. At first glance she has $8975 of taxable income and nobody can claim the American opportunity credit. But if she reports $12,975 as income on her return, the parents can claim $4000 of qualified expenses on their return.
So you get a $2500 tax credit and if that is her only income, she pays no tax, because the amount is less than $14,600.* Books and computers are also qualifying expenses for the AOC. So, the amount of reportable scholarship could be reduced further.
You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter in TT is not sent to the IRS.
Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately. In her interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording). Be sure the amount in that box is $4000. That will put all her excess scholarship as income on her return (line 8r of Schedule 1).
Be advised some people are saying they're not getting the "Amount used to claim the tuition credit" (or “Education Expenses used for a Tax Credit”) screen on the dependent’s interview. Check the student information work sheet (part VI, line 17) to verify it was entered. If not, the alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T.
There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship ($12,975) and enter the 1098-T, on her return, with 0 in box 1 and the taxable amount in box 5. In that case the amount in the "Amount used to claim the tuition credit" box is 0 (if it comes up and it shouldn't).
*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).
