Deductions & credits

@Hal_Al   Thanks for the additional information.

I just realized that though this distribution was made via '529CollegeAdvantage', it's actually a 'prepaid tuition' program.  I'll have to check with the state on specifics but there seem to be some limitations on use of 'true prepaid' programs.  Those limitations may include use on tuition only (not books or room/board). Sorry for any confusion there (i bought this fund 19 years ago and never looked at it since).

Nevertheless, I need a 'simple' solution to my problem and I think I may have found it!

I verified the 'Taxable Portion of Distribution' first mentioned by @NCperson as $2184. Unless my plan allows things other than 'tuition credits' this is the number I'll use on my daughters return as the 'Taxable portion of the 1099-Q Distribution" (so as to avoid the 'double dipping').

After much trial and error (like, 7 hrs straight), I finally backed tracked through all the forms to realize there is a section on the 1099Q (in TurboTax 2019 form mode) that allows for just such inputs!

Here is what I changed:

1099Q - "Qualified Tuition Program (QTP) Computation of Taxable Distribution" section:

1) Changed line 2c (column 1) from 0 to 4000  *This arrives at a line 7 amount of $2184 as previously calculated

2) Changed line 2c (column 2) from 0 to 7590  *This results in a zero for the 10% taxable column

Unfortunately, change #2 alone did not eliminate the 10% penalty and form 5329-T was still showing a calculated 10% penalty on the new $2184 number. Trying to change form 5329-T, Part II, Line 6 to zero out the penalty results in 'errors' when you run the checker.

The final section of the 1099Q form has a section called "Distributions not subject to 10% tax".  Just what I was looking for! Line 1 showed the $2184 and there are several line 2 options to supposedly adjust that down. Clicking in those cells to enter an 'override' pops up another worksheet where you can enter descriptions and an amount. However, the entries do not persist in the form after you close the popup window (IS THIS A BUG IN TURBOTAX?)

What I find MOST interesting in ALL of this...is that line 2e is titled  "Included only because qualified expenses were taken in determining American Opportunity or lifetime learning credit".Or, per the 'help' button on that popup screen: ""The amount of taxable earnings allocable to income as a result of taking the American opportunity or lifetime learning credit".

So this is how you apparently claim the 'exception' for the 10% penalty???

Too bad that Form Mode field doesn't seem to work (ie Won't take a value in Form Mode). Nor does 'overriding' the total field for those lines make the penalty go away.

So, I changed line 1 in that section,"Distributions included in income", from 2184 to zero and that resulted in the penalty going away (and zero'ing out all fields in form 5239-T, which I then deleted). This still is probably not entirely correct but it arrives at what I think is the correct outcome  - she pays 'income tax' on the excess distribution of $2184 but doesn't have to pay a penalty on distribution because the excess was caused be me taking the AOTC credit on my return.

If anyone has any clue how to make an entry stick in line 2e of the above noted section please post it here. Or if this is confirmation of a BUG/DEFECT...maybe someone knows how to report that to Intuit?

Getting closer....thanks all!