Received a 1098-T for our daughter but the funds to pay for her college come from a 529 Savings that is funded by her aunt. We can't deduct this on our taxes, correct?

Q. We can't deduct this on our taxes, correct?

A. No, that's not correct.  What you can't do is "double dip", claim two tax benefits for the same college expenses.  But the family (parents, aunt and student)  get to decide how to allocate the expenses for the maximum tax benefit. And that is, almost always, for the parent to claim the tuition credit, first.  See full explanation below.

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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, but the aunt in this case), and a “beneficiary” (the student). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to (the student or the aunt). 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 (on the parent's return)

 =$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 $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income  (to the recipient)

**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. Most people come out better having the scholarship taxable before the 529 earnings. 

If you are asking, can you make a deduction on your tax return for the 529 Plan withdrawal, the answer is no. The 529 Plan withdrawal is reported on a 1099-Q and only needs to be reported on the tax return of the person whose SSN is on the form if the withdrawal is more than the tuition paid in Box 1 of the 1098-T and other adjusted qualified educational expenses. In that case, the earnings on the excess distribution would be taxable income.  To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement.

First, find out if your daughter received the 1099-Q. If she did, compare it to the 1098-T added to other qualified educational expenses to determine if you need to have your daughter file a tax return if the withdrawal is more than the expenses.  Your daughter would receive the form if the check were mailed to her or her educational institution. 

Please review the TurboTax article Guide to IRS Form 1099-Q: Payments from Qualified Education Programs for further details.

You can report the 1098-T on your tax return if your daughter qualifies as your dependent. You may also qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit as long as it is not for the same expenses that the 529 Plan was used for. For example, If the 529 Plan withdrawal was $5,000 and the tuition and qualified educational expenses are $10,000, you can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your 529 plan will be reduced by $5,000.

Please see the TurboTax articles Guide to Tax Form 1098-T: Tuition Statement and What Are Education Tax Credits? For additional information.

If your daughter files a tax return, make sure she checks the box indicating that someone else will claim her as a dependent.