The 1099-Q is only an informational document. It does not have to be reported on your tax return 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 will enter nothing about the 1099-Q on the actual tax forms.
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."
But, there's a caveat. If the parents are claiming a tuition credit, because the student is their dependent, they cannot claim the money from the 529 plan for the credit. That would be double dipping.
But, since the tuition credit is more generous than the 529 plan exclusion, you should reduce the expenses you claim for the 529 exclusion to allow them to claim the credit. You may have to pay a little tax on the distribution, which means you will have to enter the 1099-Q. Reply back for instructions, if needed. The parents need $4000 of tuition to claim the maximum credit.
