529 plan, AOTC, and 1098-Q send to parent and student

Did you have any 'out of pocket' Education Expenses that were not covered by Scholarships or 529 distributions?  If not, you don't qualify for an Education Credit and don't need to enter either the 1098-T or 1099-Q in your return. 

If 529 Distributions were only used for Qualified Education Expenses (which would include room and board), you don't need to enter the 1099-Q in your return.  Click this link for more info on Form 1099-Q. 

If you believe that your daughter has Taxable Scholarship Income, enter the 1098-T's and 1099-Q on her return.  

You can enter Education Expenses not reported on a 1098-T (save your receipts), such as Tuition, Books, etc.  Just enter the school info and indicate that 'you didn't receive a 1098-T'. 

The AOC credit amount is equal to:

• 100% of the first $2,000 of qualified expenses, plus
• 25% of the expenses in excess of $2,000.

Review the Student Information Worksheet to see how the credit is calculated. 

Since we can't see your tax return in this forum, you may want to request an Offline Review if you need more help. 

Usually you allocate $4000 to AOTC. That gets you the maximum AOTC. Although the first $2000 does get you the most benefit. 

Then you allocate as much as is needed to the 529.

Only allocate to scholarships whatever is left over, since the student will pay little or no tax on taxable scholarship because of  a larger standard deduction for scholarship income.

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Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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, in case of an IRS inquiry.

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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.