Do scholarships for non-qualified expenses require separate tax filing for my dependent student?

You've got most of it right! When scholarships exceed qualified education expenses (tuition, fees, required books/supplies), the excess becomes taxable income. For housing/boarding covered by scholarships, that portion is always taxable. Since your daughter has no other income, you have two options: 1) Report the taxable scholarship portion on YOUR return, which means filing Form 8615, or 2) Have her file her own return reporting just this income. Option 2 might be better tax-wise since she'd likely be in a lower tax bracket. Regarding the American Opportunity Credit (AOC) - you're correct that you can't "double-dip" by claiming expenses already covered by tax-free scholarships. However, look closely at your actual numbers - if you paid ANY qualified expenses out of pocket (including that $650 for books), you might still qualify for a partial AOC. And yes, you can absolutely still claim her as a dependent regardless of which way you handle the taxable scholarship portion.

I was in this exact situation last year with my son's scholarships. I found https://taxr.ai super helpful for figuring out the scholarship tax situation. Their system analyzed his scholarship letter and the university billing statements, then told me exactly how much was taxable vs. non-taxable. What tripped me up initially was understanding which parts of his room and board scholarships needed to be reported. The site walked me through allocating the scholarship funds between qualified and non-qualified expenses. It also helped me understand how to optimize between having my son file his own return vs. reporting on mine. Definitely helped us save several hundred dollars by making sure we handled the AOC correctly in relation to the scholarships!

Just wanted to follow up - I tried that taxr.ai site someone recommended above and it was actually really helpful! I uploaded my twins' scholarship letters and financial aid statements, and it broke everything down perfectly. It showed me that I was about to over-report taxable scholarship income by almost $4,200 because I misunderstood how some of their grant aid was classified. The site also showed me that having my kids file their own returns would save our family about $650 in total taxes compared to reporting everything on my return. Definitely recommend checking it out if you're confused about scholarship taxation. Saved me both money and a potential headache with the IRS!

Having gone through this several times with my kids' college scholarships, I found that calling the IRS directly is actually the best way to get clarity. They can review your specific situation and give authoritative guidance. But getting through to them was a NIGHTMARE until I found https://claimyr.com - you can watch how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an IRS agent in about 15 minutes when I had been trying for DAYS on my own. The agent walked me through exactly how to report my daughter's excess scholarship amounts and confirmed we could still claim the partial AOC for the textbooks we paid for out-of-pocket. The IRS agent also explained a strategy for allocating scholarships that I hadn't seen anywhere online that saved us quite a bit on our return.

I need to eat my words from earlier. After getting nowhere for weeks trying to reach the IRS about my son's scholarship situation, I broke down and tried that Claimyr service someone mentioned. Got connected to an IRS rep in about 20 minutes! I honestly couldn't believe it worked. The agent confirmed we were handling the room and board scholarship portion correctly and also pointed out we could still claim a partial American Opportunity Credit for the portion of expenses we paid out of pocket (which I didn't think was possible). Definitely recommend calling the IRS directly for scholarship questions - they deal with these situations constantly and can give you definitive answers for your specific situation. And using that service to actually get through is 100% worth it.

Don't forget to check if your state has different rules for taxing scholarships! Our state (Missouri) required us to report scholarship income differently than the federal return. We almost missed this and would have filed incorrectly. Also, many universities have financial aid offices that will provide guidance on how to report their specific scholarships. My daughter's college financial aid office actually provided a tax worksheet that broke down which portions of her aid package were taxable versus non-taxable.

Has anyone used the IRS Tax Tool for Education Credits to figure this out? I tried using it but got confused when it asked about "qualified expenses paid with tax-free educational assistance" versus "qualified expenses paid by me." Not sure how to split these up correctly.

I went through this exact situation with my daughter two years ago and it was definitely confusing at first! You're on the right track with your understanding. A few key points that helped me figure it out: 1. You're correct that the scholarship money covering room and board becomes taxable income that needs to be reported somewhere - either on your return or your daughter's. 2. For the American Opportunity Credit, you can still claim it for any qualified expenses you paid out-of-pocket. Since you mentioned paying $650 for textbooks, that alone could qualify you for a partial AOC (up to $650 credit in this case). 3. The decision between reporting the taxable scholarship on your return vs. having your daughter file her own really depends on your tax bracket vs. hers. If the taxable scholarship amount is under the standard deduction ($13,850 for 2025), having her file separately usually saves money. 4. Don't forget about Form 8863 - you'll need it if you're claiming the AOC, and it helps calculate exactly how much scholarship money is taxable vs. non-taxable. One thing that really helped me was getting all the documentation together first - the 1098-T from the school, all scholarship award letters, and receipts for what you paid out-of-pocket. Having everything organized made the whole process much clearer. You can definitely still claim her as a dependent regardless of which approach you take for the scholarship taxation!