Q. As I understand it, you can take the tax-free scholarships and count as income, so that you receive a higher AOC amount, is that correct?
A. Yes, as long as the scholarship is not "restricted" (it must be used for/allocated to tuition).
Q, Does that apply if you get Chapter 33/GI Bill payments also? Can those be counted as income?
A. No
Q. We are not going to claim her this year so she can get the AOC credit?
A. You're essentially not allowed to do that. If she CAN be your dependent, she cannot claim the refundable portion of the AOC, even if you don't actually claim her.
While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out. A full time student, under age 24, is only eligible for the refundable portion (up to $1000) of the American Opportunity Credit (AOC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support. It is usually best if the parent claims that credit.
If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit. The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)
