Q, Why doesn't he take the 4000 off of what he's claiming as income from the scholarship?
A. Because you used $4000 of the box 1 amount for the AOTC. That amount is no longer tax free.
Q. Since his scholarships exceeded his qualified expenses, should he claim the difference between $10,249 and $4,000 (the threshold for AOTC) as income? Or the difference between box 1 ($4,947) and box 5 as income? Or the whole amount of his scholarship? Or some other scenario?
A. Some other scenario.
Student has a 1098T with $4,947 in box 1 and $10,249 as scholarships in box 5. At first glance he has $5302 of taxable income and nobody can claim the American opportunity credit. But if he reports $9302 as income on his return, the parents can claim $4000 of qualified expenses on their return. He can allocate $947 (4947-4000=947) of the tuition to the scholarship, keeping that much tax free (plus any books or a computer).
Q. About putting "anything else" from 1098-T into Turbo Tax, it does ask for box 5. So do I just leave that blank since he's reporting it as income?
A. Yes
TurboTax can theoretically handle all that when you follow the interview carefully. But, it goes smoother if you 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 his 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. You must complete the “education information” subsection to get that screen, That will put all his excess scholarship as income on his 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 and enter the 1098-T, on his 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).
