Does the 1098-T count towards my child's income?

If her box 5 is larger than box 1, you child has income that would be reported with her other income. The taxable scholarship income will be added to her wages. 

Since she has taxable income, you may want to increase her taxable income and liability a little to drastically increase her education credit. 

There are way too many people that fail to realize the box 5 scholarships can be applied to room and board and other expenses of college that are not tuition, books, and required materials. If you choose to include that scholarship in your income, you have the education expenses from box 1 left to claim the education credits.

If the person claiming her qualifies to take the credit. Please see:

Tax Benefits for Education: Information Center

Why is my scholarship taxable?

What expenses qualify for the American Opportunity Tax Credit and which ones do not?

What's the income limit for the American Opportunity and Lifetime Learning Credits?

For example:

Box 1 $15,000

Box 5 $20,000

Options are:

• Make $5,000 taxable income and nobody gets education credit
• Mark part of box 5 used for room and board and other expenses,  Pick any number, say $8,000. This leaves $3,000 for education credits to be claimed. $8,000 goes into taxable income. Education credit is claimed claimed on $3,000.

The IRS suggests you play with the numbers for the best deal for you.

Yes, the students 1098-T might count toward's the student's income.

But, the $4100 limit is ancient history (2017).  Your child does need to file a tax return unless she has over $12,200 of income (2019), including any taxable scholarship.  This assumes that she has less than $1100 of investment income (interest, dividends, capital gains, taxable 529 plan distribution).

Here's another explanation of how to get the tuition credit even if your student has "too much" 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 school’s billing statement specifically shows the scholarships being applied to tuition or 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.  $4000 is all that's needed to get the maximum AOC