college expenses enters but 529 distribution still being taxes

[ElleLDL]

filling out turbo tax return for my daughter, using the free file turbo tax. She is a college student and we can and are claiming her as a dependent. We do not qualify for any education tax credits (like the AOTC). We took a 529 distribution in my daughters name. She is the beneficiary. The distribution was all used to pay for allowed educational expenses. The distribution was for $13,100 and her allowed expenses are slightly more than that at $13,400.  I have entered the 529 distribution into turbo tax and I have entered all of her educational expenses. Turbotax is still taxing the 529 distribution. What do I need to do to get this corrected?

[Hal_Al]

Q. What do I need to do to get this corrected?

A. Delete the 1099-Q. It is only an informational document. The numbers on it are not required to be entered onto your tax return. 

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 (TT) will enter nothing about the 1099-Q on the actual tax forms (nothing is reported to the IRS). 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." 

Basically, there's a flaw in TT.  It uses some of the expenses for the tuition credit even if you are not eligible. 

If you try to force the 1099-Q into TT, I don't think you will be allowed to continue in the free edition, even though no additional IRS forms are generated.

[ElleLDL]

Thank you. Do I need to enter the 1098-T information on the student taxes?  The 1098-T is being reported on the parent taxes and again we do not qualify for any educational tax credits. 

[Hal_Al]

Q.  Do I need to enter the 1098-T information on the student taxes?

A. No, unless the student's scholarships exceed her adjusted  qualified expenses.  Then, she would have taxable scholarship income.  Student dependents do not usually qualify for an educational credit.*

Q. The 1098-T is being reported on the parent taxes and again we do not qualify for any educational tax credits.  Correct?

A. No.  Like the 1099-Q, the 1098-T  is only an informational document.  You do not enter it on the parent's return if the parent's do not qualify for an educational credit or the expenses are not needed to calculate the taxable portion of a 529 distribution ( if you don't enter the 1099-Q, you don't enter the 1098-T). 

*If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)