The scholarship on my daughter's in item 5 on Form 1098-T should not be repaid and it is lower then amount in item 1 on the form. How should I be sure that the scholarship in item 5 on the form is not going to be taxable when you enter to the tax software?
You want to maximize your credit, so you really want at least $4,000 in qualified expenses, not $3,000. Your books and supplies may make up the additional $1,000. You should definitely send up to $1,000 to the student for income. That would be a minimal or no tax depending on work done. Your goal is to maximize your refund, not reduce income. It seems backwards, but in this case, that is what actually works out better. I recommend you look at another of my answers for help.
See also:
IRS Q & A about education credits.
What expenses qualify for the American Opportunity Tax Credit and which ones do not?
The scholarship, or part of it, may be taxable. It all depends on how the scholarship funds were spent. If the scholarship was used for tuition, fees, books, supplies and equipment required for a given course(s), (sometimes referred to as qualified educational expenses) then the scholarship funds will not be taxable. If the scholarship was used for room and board, or travel, then the funds for such expenses would be taxable.
TurboTax will ask questions about how the scholarship funds were used. Answers to these questions will determine whether any of the scholarship is taxable.
Here is a link to a TurboTax article discussing scholarships and taxes which you might find helpful.
Hi GeorgeM777. Thank you for the answer. In item 1 on 1098-T amount recorded only for educational expense, the college told me. The scholarship in item 5 is $ 3,000.00 less then educational expenses in item 1 on the form 1098-T. The room and board is not included in item 1 on the form. I think it does not have to be taxable.
You want to maximize your credit, so you really want at least $4,000 in qualified expenses, not $3,000. Your books and supplies may make up the additional $1,000. You should definitely send up to $1,000 to the student for income. That would be a minimal or no tax depending on work done. Your goal is to maximize your refund, not reduce income. It seems backwards, but in this case, that is what actually works out better. I recommend you look at another of my answers for help.
See also:
IRS Q & A about education credits.
What expenses qualify for the American Opportunity Tax Credit and which ones do not?