1099-Q and 1098-T

Q. The 1099-Q is showing up as taxable income in Turbo Tax and she owes 2k.  Is this correct? 

A.  Simple answer: No.  TT assumes that you (on the parent return) are claiming the tuition credit and reduces the amount of expenses available for the 1099-Q. There are ways to control the interview, but the simple solution is just don't enter the 1099-Q (or even the 1098-T).

Q. Do I even need to report it (the 1099-Q)? 

A.  No.  

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

If you are otherwise eligible, you should claim the American Opportunity Credit on your tax return. This assumes she is your dependent.  That will "consume" $4000 of the tuition that will no longer be available to use against the 1099-Q.  But, books and a required computer and room and board are also qualified expenses (even if she lives off campus or even at home) for an ESA distribution (1099-Q).  So, none of it will be taxable and still does not need to be entered.