Took $1250 of distribution, of which $430 is earnings per the 1099Q. The $430 is appearing as taxable income on Sch 1 Ln 8z. Tuition expenses, even after deducting 4K for AOC, are far more than distribution. AQEE is 9983, less 4000, is 5983. This exceeds the 1250 obviously. Why is TT making the earnings portion taxable at all, when the entire distribution (earnings and basis) was used for qualifying expenses.
The interview is just complicated because it has to handle multiple scenarios*.
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 will enter nothing about the 1099-Q on the actual tax forms. 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."
*One possibility is that TurboTax allocated $10,000 of your college expenses to claim the maximum Lifetime Learning Credit credit. That, in your case, eliminates the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary". Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it. You may reach that screen sooner.