It depends on what the scholarship income is used to pay for - if you use your scholarship to pay for any of these, it counts as income and the amount paid is taxable:
On the other hand, if the scholarship funds are used for tuition,fees, books and supplies required for your course, then that portion of the scholarship income is not taxable income.
Please see the following TurboTax FAQ, "Why is my scholarship taxable?":
https://ttlc.intuit.com/replies/3651222
To enter your scholarship income in TurboTax, in your return, go to Federal Taxes, Deductions & Credits, Education and the program will walk you through the information about your scholarship income, to determine what's taxable.
I want to report scholarship as income so that I can claim an educational tax credit. How do I do that?
To clarify, did you receive a 1098T from your school and were there amounts filled in line 1 and line 5? Otherwise, were your scholarship reported on a tax form issued to you by the scholarship donor?
Different situation, but related question:
Currently I have a scholarship that wipes out all of my expenses that I could use for AOC. I suspect that if I include a portion of my scholarship as taxable income, I could claim some of this credit. Per Pub 970, p. 16-17. Note the line: "The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn't prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified expenses.", see also Example 4 on p. 17.
@DaveF1006 , how can I include some of my scholarship as taxable income in order to claim this credit? Should I fudge a 1099-MISC or some such?
The terms of the scholarship or grant must allow it to be used for expenses other than qualified education expenses to use this potential tax-saving technique.
To make some of the scholarship taxable on your return so you can maximize the American Opportunity Credit, select Edit next to Scholarships/Grants in the Education Summary screen. Answer Yes to Did you pay room and board with a scholarship or grant? and enter up to the amount that will maximize the credit or the amount that you spent on non-qualified education expenses:
Room and board.
Travel.
Research.
Clerical help.
Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.
This will enable you to maximize the American Opportunity Credit. That portion of the scholarship will correctly become taxable on line 1 of Form 1040.
@CalixBarrus