If you're having your accountant file your return, this can probably be simplified. He can make the necessary entries right on the tax forms. The hard part is entering it all in TurboTax.
Based on your example above and assuming your son has no other significant income:
1. You enter $4000 of QEE on form 8863, of your return, to claim the American Opportunity Credit.
2. You son claims $4500 of taxable scholarship income on Schedule 1 (line 8r [new entry point for 2022]), of his return.
3. He does NOT report the 1099-Q, at all. None of it is taxable, because $4500 of QEE previously covered by tax free scholarship is now being covered by the 529 distribution, and the 529 distribution is now a fully qualified distribution.
