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. Davids 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. Davids 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. Davids 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