IRS Scholarship Tax Loophole when Form 1098-T Box 5 is larger than Box 1

[Momof2boyz]

I have a 20-year-old son in college who earned several scholarships. He also works two jobs. I am specifically confused about the IRS Tax Loophole regarding the scholarships and the AOC credit and all of the examples using the $4,000 qualifiable tuition expense amount when Form-1098 Box 5 exceeds Box 1. Even with the scholarships, my son still paid out-of-pocket for the remainder of his total expenses using money he earned from a job ($2,809.45). This amount is not listed on the Form-1098. I have manipulated the numbers multiple times using the Tax Loophole examples...putting $4,000 in box 1 and leaving box 5 blank on my return while on his return, leaving box 1 blank and putting the difference between block 5 and block 1 minus books ($409.45) in block 5 ($9,278.11)--  compared to entering the Form-1098 as it states.  The difference in refund between the two ways on our return is $3,000, so I really need to ensure that I am doing it all correctly.  It does not make sense to me to receive thousands of dollars back from the AOC when we did not pay anything for the actual tuition. That's what I can't understand. Am I supposed to use the $2,809.45 in my block 1 instead of the $4,000? I am aware that only tuition is a qualified expense and not taxable. I am aware that the amount of scholarships applied to room and board is taxable and that he needs to claim these as income. I am aware that he can not claim educational credits if he is claimed as a dependent on our taxes. I know the credits work off claiming expenses reported in Box 1 on the 1098-T. There are no restrictions on his scholarships. He can apply them to tuition or room and board. My son pays all of his expenses for housing and meals with his scholarships. He pays for his own gas and personal expenses. He only comes home for holidays.

Form 1098-T Box 1:  $11, 116.44.    Box 5:  $20,804.00. 

(1)  How can I do the tax loophole correctly? 

(2)  What amounts need to be entered on his return for Box 1 and Box 5?

(3)  What amounts need to be entered on our return for Box 1 and Box 5?

(4)  How do I then answer the TT interview questions correctly?

(5) How do I address the $2,809.45 that he paid in cash for expenses after scholarships covered the rest that is not listed on the Form-1098? Do I use this amount instead of the $4,000?

(6)  Should I claim him as a dependent?

(7)  Should he file stating he can be claimed as a dependent but is not being claimed as a dependent?

[AmyC]

1. You are correct to claim $4000 n box 1 on your return. 

2. Your son will have $20804 minus $7,116 tuition minus $409 books in his box 5 and zero for tuition.

3. Box 1 $4k and box 5 zero

4. The goal is to get the right answers on your tax return. The program is not part of your return. Which is why you can enter weird numbers, and make wrong choices -only the final answer on the tax return goes to the IRS. To enter, see Video: Guide to IRS Form 1098-T Tuition Statement

5. The money he earned that he spent however he wanted will go on his tax return. It isn't related to school tuition.

6. If he meets the requirements to be claimed as a dependent, yes. Otherwise, you don't get the tax credit. Take this quick quiz, Whom May I Claim as a Dependent? and IRS Worksheet for Determining Support. You may be paying for health insurance, trips home, providing a permanent home, vacations, clothes, etc. Many college kids are still supported by their parents,

7. No, either you claim him or he does.

The IRS has a great brochure that explains how scholarships and tax credits interact.