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solution

• David is 19 years old and a full-time college sophomore majoring in physics. The
college is an eligible educational institution. He resides on campus during the school
year and lives with his parents during the summer.
• David spent $1,500 on books in 2021.
• David’s parents provided more than half of his support.
• David has never been convicted of a felony.
• David received Form 1098-T as shown on the following page. The Box 5 amount is
an unrestricted scholarship. David received no other income in 2021.
• David and his parents are U.S. citizens with valid Social Security numbers.
• David and his parents came to the site to have their returns prepared. They want to
maximize the tax benefits for the family.

1. David’s parents would like to claim the American opportunity credit on their tax
return. What treatment would provide David and his parents the most favorable
outcome?
a. David’s parents can claim only $1,500 as qualified education expenses.
b. Neither David nor his parents can claim the credit because the scholarship
income was more than education expenses.
c. David includes $3,500 as taxable scholarship income and his parents claim
$4,000 in qualified education expenses.
d. David includes $7,500 as taxable scholarship income and his parents claim
$4,000 in qualified education expenses.

2.For the purpose of determining if David has a filing requirement, taxable scholarship
and fellowship grants are considered:
a. Earned income
b. Unearned income
c. His parents’ income
d. Scholarship and fellowship grant income is never considered taxable

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