Q. Do I need to add the income from the scholarships to determine if he needs to file?
A. Yes.
Q. When you say to claim the full $4000 for the AOTC credit, would I do that by putting $4,000 for qualified expenses and $0 for scholarships?
A. Yes, on your (the parent's) return.
From IRS Publication 970: A scholarship or fellowship grant is tax free only to the
extent:
• It doesn't exceed your qualified education expenses;
• It isn't designated or earmarked for other purposes
(such as room and board), and doesn't require (by its
terms) that it can't be used for qualified education expenses
So, the $4858 sounds about right. So the student has $4858 of taxable scholarship. $8398 - 4858 = 3540 allocated to tuition. 9711 - 3540 - 2642 -700 = $2829 of expenses to claim the AOTC. You need $4000- 2829 = 1171 more expenses. So, the student increases his taxable amount tp 4858 + 1171 = $6029
How does the student report his $6029 of taxable income? The easiest way is to enter a 1098-T with 0 in box 1 and the calculated taxable amount ($6029) in box 5.
But 9627 (W-2) + 4858 = $14,485 and that's less than $14,600. So he doesn't have to file. Adding $1171 means he does have to file. At $2829 of expenses, you get $2207 AOTC. Having him file gets your $2500, but he pays $100-$200 depending on your tax rate (the kiddie tax applies)
