I would do the math differently.
Tuition: 57879
Books: 554
Room and Board: 15990
Total Qual. Expenses: 74423
529 WITHDRAWALS
Withdrawal (from 1099-Q Box 1): 70393
Earnings (from 1099-Q Box 2): 10538
1099-Q went completely to education expenses with $74,423- 70,393 = $4,030 of expenses still to be covered.
Scholarship: 9848 -$4,030 education expenses =$5,818 scholarship income to student with no AOTC. No good if you qualify for AOTC.
Since you want AOTC, student takes the $5818 above plus $4k more as income for $9,818. The first $12,400 is not taxed for the student. You get the AOTC, 1099-Q fully used, no tax, no penalty.
@dyons
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