Q.It appears to me that the IRS guidance leaves room to take advantage of the AOTC even with a full-ride scholarship?
A. Yes. You can do what you propose to do.
Q.I'm just not sure whether additional expenses need to be left "unspoken for" in order to shift the allocation around, nor whether those expenses need to all have been accounted for by the university?
A.You claim the tuition credit, or report scholarship income, based on your own financial records.
As you apparently know, There is a tax “loop hole” available, and the IRS encourages use of the loop hole. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), 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.
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.
