Q. I was wondering if the total of the education credits (Lifetime Learning and American Opportunity Tax Credits) taken over the prior years can somehow be used to reduce the amount of the tax penalty.
A. No.
References https://ttlc.intuit.com/community/college-education/discussion/529-plan-withdrawals-and-prior-year-s....
There's some disagreement on this subject, but even the ones who disagree seem to say it should be done prior to graduation. Peter J. Greco, CPA, founder and chief tax strategist at the CSI Group, believes you have more latitude when deciding when to take the scholarship distribution*. “Most believe and have written that the distribution must be made in the same year that the scholarship paid for the tuition expense,” Greco says. “However, IRS 970 is silent as to when the money must be withdrawn. If Congress is trying to encourage 529 plans, then it makes good policy sense that the withdrawals can be made any time prior to graduation.” https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/
https://ttlc.intuit.com/community/college-education/discussion/re-529-plan-scholarship-refunded-late...
*I'm assuming the same rationale would apply the the Education Credit exception to the penalty
