As simplistic as it is, @Critter-3's answer is correct. The parents enter the 1098-T with $4000 in box 1 and nothing else. Theoretically, TurboTax (TT) can handle the complications you describe, But, as you have already discovered it gets messy real fast. So, the best way to do it is just enter the 1098-T with $4000 in box 1. You only need $4000 of expenses to claim the maximum tuition credit (AOC).
Neither the parent nor the student enters the 1099-Q. The student does not enter the 1098-T, or any other educational info on his return (other than that he is a full time student in the personal info section). Only if his scholarships exceeded his adjusted qualified educational expenses (AQEE) would he need to enter anything. Then, some of the scholarship would be taxable.
What you read is correct. Both the 1098-T and 1099-Q are only informational documents. The numbers on them are not required to be entered onto your tax return. If you claim the tuition credit, you do need to report that you got a 1098-T .
You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. Or if you find it easier (and you will), just change the numbers in boxes 1& 5 to what your records and calculations show. You only need $4000 of expenses to claim the maximum tuition credit. The 1098-T that you enter in TT is not sent to the IRS. The IRS does not match numbers.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit (and you have already done that).
References:
- On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
- IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
Room and board (R&B)are qualified expenses for a 529 distribution. R&B are not qualified expenses for the tuition credit (AOC).
You may have to delete all the educational info and start over. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary". Click delete next to the student's name. You'll then get the "Your Education Expenses Summary" screen again. Click the "Add a student" button.
