Excess Scholarship and AOTC

You do not necessarily need a 1098-T if the school did not send you one as long as you have the school's Federal Employer Identification Number (EIN). 

Be sure you have school account records showing the charges and payments. Keep this with your tax file. Make sure you are only using/claiming expenses PAID in 2021 for expenses incurred in 2021 and/or the first 3 months of 2022 only. Also make sure the scholarships are not restricted to be used for a particular expense. 

I am not clear about the distribution. I am assuming the 1099-Q was issued to the student and the total, including the 2,800 that went to the student, was used for education expenses. 

The 1098-T is for computing the credit, since you already know what you want to claim, you COULD enter the "mock" 1098-T with the 4,000 in Box 1 into your TurboTax program. Finish the Education interview as if the 4,000 was the only expense and there were no scholarships and/or financial aid. Done. You should get the American Opportunity Tax Credit if all other requirements are met. 

The student enters the 5,326 as income on their 1040 line 1. 

STUDENT:

Sign into TurboTax and continue through until you can start selecting "Wages & Income" located at the top of the screen

Click on Wages & Income

(If the program asks about your W2, select Skip for now or enter any W2 you may have )

Select answers to the following questions if necessary to move forward 

Click Add more income 

Scroll down to the VERY LAST option "Less Common Income" and click Show more

On this new drop-down list scroll down to the VERY LAST option "Miscellaneous Income" and click START 

On this new drop-down list scroll to the VERY FIRST option "Other income not already reported on a Form W-2 or Form 1099"

Click START

Select YES to the page titled "Other Wages Received" and Continue

Select CONTINUE on the "Wages earned as a Household Employee" screen (enter nothing here)

Select CONTINUE on the "Sick or Disability Pay" screen (enter nothing here)

Select "Yes" on the "Any Other Earned Income" screen and continue

Select "Other" on the "Enter Source of Other Earned Income" and Continue

In Description Box type "SCH" and the amount

Click Done 

 This will put the income on the 1040 line 1 where it needs to be.

The 1099-Q needn't be entered on any return if the total distribution was used for education expenses, including room and board. 

If there is taxable income from the 1099-Q, you can enter the 1099-Q on the student's return. Also enter how much was used for education expenses and that the student received a scholarship. The earning portion of the distribution not used for education will be taxed, but the penalty tax will be waived because of the scholarship. 

According to the IRS:

"If you file Form 1040 or 1040-SR, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1."

IRS PUB 970 has some other examples of how the credits can work. 

IRS PUB 970