Q. Is the stipend foreign income, taxed?
A. Yes, as is any scholarship money in excess of the amount of tuition and fees.
Q. She cashed in 529 money equal to the amount of the scholarship and stipend. How is this reported?
A. I assume the 1099-Q was in her name and SS# (she was the "recipient"). The amount in box 2 (earnings) of the 1099-Q is potentially taxable. Because of the scholarship, none of the distribution is subject to the 10% penalty for a non-qualified distribution. Since her room and board were paid for with taxed stipend money, she may claim room and board against the 1099-Q (so the full box 2 amount will not be taxed).
Q. How does this affect claiming a tuition credit.
A. It depends. Is she still your dependent? Is so, you can claim the Lifetime Learning credit (LLC), assuming the school is on the DOE eligible list, but she would have to report more of her scholarship as taxable. The LLC is non-refundable, so it is unlikely to do her any good on her own return. If her scholarship is restricted to being used for tuition, then neither of you can claim the LLC.
