Can I take the 1098 tuition exemption if the tuition was paid by the state Hazelwood Exemption? It shows up as my daughter paying tuition.

As I understand it, you are not receiving directly any money due to the Act; instead, tuition is being waived, right? That is, you have not received a 1099 type form showing this amount as income, right?

Generally, you cannot take any credits or deductions on any money that you did not pay tax on. Does that cover your question?

Q. Can I take the 1098-T tuition credit if the tuition was paid by the state Hazlewood Exemption?

A. No. Hazlewood is a tax free benefit.  As such, you cannot claim  another tax benefit; that's "double dipping".

Q. But, what if I  received a 1098-T for almost the same amount as the state paid to the university.

A. If the Hazlewood amount is in box 1 of the 1098-T, it should also be in box 5. Normally, you are allowed to claim, for the tuition credit, only the difference between box 1 and box 5 . TurboTax will do that automatically (box 1 minus box 5 must be a positive amount).

Normally,  the amount of Hazlewood money does not show up in either box 5 or box 1 of the 1098-T because it is a tuition waiver. Do not enter the Hazlewood amount at the GI benefits box in TurboTax.  You may claim the tuition credit based on books and other course materials, including computers and software.