1098T

Yes, if you claim your daughter as a dependent and she claims the scholarship income, you can  use the qualified educational expenses for the education credits.  If she is not required to file a tax return because of the amount of income, just be sure that she does not have a state filing requirement.  See Topic no. 421, Scholarships, fellowship grants, and other grants.

If that $2823 is her only income, it is not enough for her to have to file a tax return.  But, some tax people recommend that she file anyway to document the reporting of the scholarship as income. Even if she has other income, she will pay not tax until her total income reaches $14,600 (unless some of her income is from investments).

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Q. box 1 of my Daughters 1098T was 2,433 and box 5 was 2,823. can I have her claim the entire 2,823 as income so that I can take the credit?

A. Yes.

There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this  if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. She would only need to report $5000 of taxable scholarship income, instead of $6000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.