You do not need to enter the 1099-Q because you are not the recipient and because there is no taxable income generated by the 529 withdrawal.
Your granddaughter is 25 and is no longer a qualifying child. She is now a qualifying relative. She is in graduate school so you no longer can claim the American Opportunity Tax Credit. You can claim the Lifetime Learning Tax Credit by following these steps.
- Your granddaughter can file a tax return and have up to $4350 in taxable income. She will file the 1099-Q. The combined 1099-Q amount that she claims as taxable income and any other income she may have made during 2020 cannot be more than $4350. If she claims income above $4350, she will not longer be your dependent as a qualifying relative.
- Then you can claim the 1098-T and get the Lifetime Learning Tax Credit on $4350.
[edited 3/2/2021 | 1:01 pm PST]
