Handling various 529 distributions to get to AOTC in TTax

Before I give you an answer to this I want to clarify the amounts that you are including in the qualifying expenses of $20,000.  

The IRS has one definition of qualifying expense for the credit and another for distributions from the 529 plans. 

Does the $20,000 represent tuition and required fees only?  Or does it include other items such as room, board, activity fees, books, supplies, or any other expenses not required for attendance?  

beyond the question @SusanY1 asked, what is in Box 1 and Box 5 of the 1098-T? any numbers in any other boxes? if so, what are they? 

to simply your question, and awaiting @SusanY1 response, the 1099-Q are reported on the tax return of the person whose social security number is on the form, not who owns the 529 plan.  So you should find that you child's ss# should be on the forms via the grandparents 529 plans since those payments went directly to the college.  If you child is required to file, these 1099-Q's should be filed on the students tax return! 

First, and most important of all, you should claim $4000 of expenses for the AOTC!  This will result in you son reporting a small amount of the 529 distributions as taxable income.

Treat the $1000 distribution you took in you name as qualified (non taxable).  Treat the grandparents distributions as described below.

For 529 plans, there is an “owner” (usually the parent and sometimes a grandparent or other relative), 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. 

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

The student has $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.  I