Qualified educational expense (QEE) =12896 + 12225 + 100 = 25221
25221 - 4000 for AOTC - 6750 scholarship = $14471 QEE available for 1099-Q
16896 - 14471 = $2425 non qualified 529 distribution
2425 / 16896 = 14.35% of 1099-Q earnings are taxable
0.1435 x 6285 = $902 of taxable income on the parents return
Alternate (and better) plan: Student reports $2425 of scholarship as taxable on her return, freeing up $2425 of QEE for the 1099-Q, for the parents.
$2425 + 5000 (intern income) = $7425 total student income. This is less than the $12,950 filing threshold, so she will still owe no tax.
Do not enter the 1099-Q, on anybody's return. The calculations are too messy and mistakes will be made. Enter the 1098-T, on the parent's return and claim the AOTC. Enter a modified 1098-T on the student's return with 0 in box 1 and $2425 in box 5. This modified 1098-T is not sent to the IRS. $2425 of income will go on line 8r of Schedule 1 (this reporting place is new for 2022).
Keep a copy of your calculations.
Q. She will live off campus next year, for future returns, shall we use the actual apt rental rate or school published rate for next year?
A. You use the lesser of your actual cost or the school's "allowance for attendance" (essentially the published rate).
