Scholarship as income?

[heidimay]

Why is TT saying my college age daughter, who is my dependent, has to claim her scholarship as income?

"It Turns Out Lindsay's Education Assistance Counts as Income. That's because scholarships & other education assistance are considered taxable income if they exceed Lindsay's education expenses, if the money was used to pay for nonqualified expenses, or if Lindsay was not enrolled in a degree, certificate or credential program at an eligible school. Lindsay will need to file a tax return to include this $6323 amount taxable income."

Why? Her tuition, as shown on her 1098-T, is $14842.12. The entire $6323 scholarship is sent directly to the school to pay ONLY tuition and fees imposed by the school. Her off-campus room and board is $13950. Her 1099-Q shows a $7717 qualified distribution which I used to pay half her rent for the school year. (I am listed as the recipient on the 1099-Q, she is the beneficiary.) 

Broken down "if they exceed Lindsay's education expenses" - Clearly, her scholarship did not exceed her education expenses, even if you want to count only her tuition as an expense.   "If the money was used to pay for nonqualified expenses," - Again, if tuition is not considered a qualified expense, I don't even know what to think.   "...Or if Lindsay was not enrolled in a degree, certificate or credential program" - Yes, she is a senior working towards her first undergraduate bachelor's degree.   "...At an eligible school." - She goes to a state school (UCSD) so how can that not be an eligible school?

Am I missing something here? Or is TT erring, or is there any possible way she really has to claim this scholarship as income?  I feel like ignoring TT's advice for her to claim it but don't want her to get in trouble.  I just think something is wrong, as we've never had this come up before even though she's always gotten this particular scholarship. I do notice every year it gets harder and harder to get the education expenses entered and accurate.

[AmyC]

Let's start at the beginning and work through this. The 1099-Q is first. $7,717, all qualified, should not be entered into the program. IRS Publication 970, Tax Benefits for Education states:

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

Let's move on to the 1098-T. Box 1 $14842 box 5 $6323. Box 1 is bigger than box 5, there is no taxable income and plenty of money left for you to take the full education credits on your return.

Some answer was incorrectly marked along the way for the program to come up with the taxable income.

The IRS also realizes how hard it is to get the moving parts right and has a great brochure that explains how scholarships and tax credits interact.