This could be possible. I assume you have a 1098-T. Does the 1098-T have information in Box 5? If so, the amount in Box 1 will be reduced by the amount in Box 5 (Scholarships/Grants). If the difference between Box 1 and 5 is less than the amount of the 529 withdrawal then that amount becomes taxable. Basically, if the difference between Box 1 and Box 5 of 1098-T and ten take into consideration the 529 disbursement comes out with an excess amount, that is the amount is taxable. My guess is if the worksheet is showing $5,000 in taxable income, then there must have been an amount in Box 5 of the 1098-T and between Box 1 and Box 5 of the 1098-T and the 529 distribution results in the income of $5,000.
