To use the "loop hole", do not enter $9500 as the scholarship amount. Enter the 1098-T, exactly as received. When asked if you want to allocate part of scholarships to room and board or other noneducational expenses, enter the full $12,000. That frees up the $2500 for the Tuition credit.
Be aware, if 2025 was your fifth calendar year in school, your parents may have already claimed the more generous American Opportunity Credit (AOC) the maximum four times allowed. In that case, you will only be eligible for the Lifetime Learning Credit (LLC). You get only $500, instead of $2125 for the AOC.
Q. I have found out that I have not been claiming the scholarship as taxable income for the past 3.5 years. What is the best way to go about remedying this?
A. You should probably file amended returns for the past three years and also for 2021, if tax is owed.
That said, be aware that Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $15,750 filing requirement (2025)* and the dependent standard deduction calculation (earned income + $450). It is not earned income for the kiddie tax and other purposes (e.g. EIC). If you did not have enough income to be required to file or enough to owe taxes, you can probably forget about it.
*$12,550 (2021), $12,950 (2022), $13,850 (2023), and $14,600 (2024).
Q. My tax returns have been accepted each year just fine?
A. Taxable scholarship is not currently an topic of IRS monitoring.
