"Lastly, I don't understand your last suggestion - transfer the funds to the school so the 1099-Q will be properly issued to the non-dependent student."
I mean, for future distributions, if the account administrator is advised to send payments directly to the student's account at the school, the 1099-Q will be issued to the account beneficiary (the student), not the account owner.
The IRS would like forms to be matched and would like a computer to be able to match those forms.
NORMALLY the student gets a 1098-T from the school showing all the payments.
NORMALLY distributions are made by the student, and the 1099-Q is issued to the student so a match to the 1098-T (expenses) is easily made.
NORMALLY a student does not supply more than half their own support (scholarships don't count as their own support) so
NORMALLY the student is claimed as a dependent on the parent's return, the parents might get an education credit for the dependent student and again an easy paper trail for the IRS.
You are indicating that the student is not your dependent and you took at least one distribution to pay for supplies, you don't say if the rent distributions were on your 1099-Q.
Regardless, this is making a mess for the IRS to easily match, but there is not much you can do at this point. There is no way of adding a letter of explanation with your 1040.
If the distribution was used for education purposes, it is not reportable/taxable income. All you can do is keep records, receipts, and the student's school account statement with your and your daughter's tax file.
If the IRS asks, you'll then need to provide that paperwork to them.
Additionally, if the student qualifies as your dependent, you CAN elect to not claim her, but in that case she would need to file as a dependent. The IRS determines who is a dependent, not Taxpayers, so you might want to readdress that if necessary.
@Deb3805
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