I would expect, after reading my initial response, that you the parent are claiming the student as a dependent on your (the parent's) return. If that's the case, then you the parent claim "everything" education related on your (the parent's) return. Understand the limits too. For scholarships/grants, they are *initially* treated as taxable income. The taxability of the scholarship/grant is offset by the *qualified* education expenses they are used to pay for.
The 1099-Q funds are treated *initially* as taxable income. If the scholarships did not cover all qualified education expenses, then the 1099-Q funds are applied to the remaining qualified education expenses. Any 1099-Q funds left over are then applied to "unqualified" (but allowed for 1099-Q funds ONLY) education expenses, such as room and board. Here's two possible scenarios.
Scholarship - $2000
529 funds - $2000
Tuition - $3000
Room and Board - $5000
The scholarship is applied to the tuition first, leaving $1000 of tuition unpaid. Next, $1000 of the 529 funds are applied to the remaining balance of tuition, leaving $1000 of "taxable" 529 funds left.
The remaining 529 funds are applied to the unqualified but allowed (for 529 funds only) Room and board, thus offsetting the taxability of those remaining funds.
2nd Scenario:
Scholarship - $5000
529 funds = $2000
Tuition - $3000
Room and Board - $5000
$2000 of the scholarship is applied to the tuition, paying it in full. Since scholarship money can ONLY be used for *qualified* education expenses, the remaining $2000 of the scholarship money is taxable income. Even if it's used for room and board.
The remaining taxable $2000 of scholarship money is applied to room and board, leaving a $3000 balance due on room and board. The $2000 of 529 funds is applied to the remaining balancing of room and board, thus canceling out the taxability of the 529 funds only. Taxes will be paid on the excess scholarship money that was not used for *qualified* education expenses.
Generally, no matter what, in a case where grants and scholarships cover all qualified education expenses, the student will report all education stuff on the student's tax return. It does not change the fact that the parent's can still claim the student as a dependent.
