How to Qualify for American Opportunity Credit

@dguirgis  said "Last year, my scholarship (Box 5) on form 1098-T was greater than the expenses in Box-1. So my parents claimed the American Opportunity Credit on their tax return, however the difference between the scholarship and expenses I put as income on my tax return. 

 You should have reported the difference plus the $4000 your parents used to claim the credit, as income on your return.  You will do the same thing this year.  See my standard explanation below.  So, yes this scenario can be used in 2021 for your 2020 return. The loop hole has not been close.

The simple  way to add the $4000: say the scholarship paid for room & board, in the interview. Enter $4000 as the amount.  If you did not add the $4000 in 2019, and it makes a difference in the amount of tax owed  (for most students it doesn't), you will need to file an amended 2019 return.

Q. Does the last Scenario in the flow chart for American Opportunity Credit mean I do not qualify?

A. No. The same expenses were not paid by tax free scholarship because you have converted the tax free scholarship to taxable scholarship.

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There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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.

This is not some sinister scheme. From the 2019 form 1040 instructions (pg 95): “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, line 18c, and IRS.gov/EdCredit.  Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole