@bill_321 said "that's why I think the 1099-Q should provide more detail."
That's not reasonable. The 529 Plan administrator has no way of knowing what you or your student did with the money or whether or not the student had a scholarship or is claiming a tuition credit.
It is reasonable to expect TurboTax (TT) to recognize the various scenarios and report the distribution correctly, on the tax forms. TT can do this, but it helps for you to have some idea of the outcome. As @Opus 17 explained, in your scenario 40% of the earnings are taxable (as you indicated, reported on Schedule 1). In addition, TT should claim the scholarship penalty exception by completing form 5329. With your "solution" to send part of the distribution to the student-beneficiary, this happens on his return, instead of yours. And yes, he can do that. It does not matter whether he is is your dependent or not.
Q. How do I enter this scenario, in TT?
Tuition $10,000 paid by scholarship
Room & Board $15,000
$25,000 529 withdrawal, by parent-owner (Earnings portion $10,000)
Neither student or parent will claim a tuition credit
A. First enter the 1099-Q. Later, in the educational expenses section, enter the 1098-T. Answer yes when asked if you have any book expenses (that gets you the screen to enter room & board). The 1098-T should have $10,000 in box 1 and $10,000 in box 5. That tells TT that the tuition was covered by scholarship and the $10,000 non qualified portion of the distribution qualifies for the penalty exception.
Be on the look out for a screen titled “Amount Used to Calculate Education Credit”.
TT does not "sense" that you do not qualify for a tuition credit so it frequently allocates expenses to the credit (sometimes $4000 but usually $10,000). Change the prepopulated amount to $0.
Here's a quicker workaround (or if you run into a snag above). Rather than entering the 1098-T later: at the 1099-Q interview, when asked who the beneficiary is, answer someone not listed here. Then enter your son's name at the next screen. That will get a you a simpler screen to enter expenses, in the 1099-Q interview. There are several screens before you get there, including one asking for the level of school the student attended. After entering the expenses, be sure to enter the offsetting amount at "Adjustments: Tax-free assistance" (scholarships).
