The education section is very complicated and difficult to explain, in part because it is one of the few areas where the IRS gives you choices. You really should have an idea of what you want before you enter the forms. If you enter your income, the 1099-Q, the 1098-T and all other education information, click the "Maximize my tax break" button, the program will allocate the numbers the way it thinks is best. If you do this, and the student is your dependent, you would enter all the forms into your program, whether they were issued to you or to the student. Your program will instruct you to report income on the student's return if applicable. You would not enter the forms a second time on the student's return, just the amount of income (if applicable) that your program instructed you to enter. The reason for this is that TurboTax programs cannot "talk" to one-another, so all the education information must be entered in the Parent's software so TurboTax can do the math.
The program may tax a distribution if it allows you to get an education credit and the credit is worth more that the tax.
For an ESA 529 account, the "Owner" is the person that opened the account, usually the parent. The "Beneficiary" is always the student. The "Recipient" is the person that made the distribution. The 1099-Q is issued to the recipient. If there is tax due on the distribution, the recipient is responsible for paying the tax. The intent is that the student would make the distributions, but people don't always do it that way. If the funds are transferred directly to the school, the 1099-Q will be issued to the student/beneficiary which is how it was intended to work.
As I said, the best way is to enter your income, the 1099-Q, the 1098-T and answer all the interview questions in the education section in your TurboTax program. Then follow the directions if your program tells you to report taxable income on the student's tax return.
If you don't want TurboTax to decide what to allocate to what, and you are sure that you want the distribution to be applied to the tuition, you could subtract the amount of the distribution from the tuition amount in box 1 of the 1098-T, not enter the 1099-Q and enter the 1098-T with the adjusted amount in Box 1.
Below are some links to IRS Publications that explain things further. The slides explain how scholarships can be allocated differently to result in more credits, and the same is true for distributions.
IRS Powerpoint IRS PUB 970
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