<p>
Yes, the $7,000 would be taxable income. But, a tax credit is a $ for $ reduction of taxes and a $2500 credit will far exceed any tax on $4000 of income. </p>
<p>For instance, if the students marginal tax rate is 10%, $4000 of additional income would generate $400 in taxes. $4000 of qualified education expenses used to claim the AOC would generate up to a $2500 tax credit. (100% of the first $2000 and 25% of the remaining $2000). Of this $2500, $1,000 is a refundable credit (meaning even if the taxpayer has no tax liability, they can get $1,000 refunded as if they had paid that in taxes). </p>
<p>My daughter’s tax bill was always a little higher by electing to make some of her scholarship money taxable, but the overall tax savings between her and us was worth it and we just paid her taxes for her.</p>