Maybe this will help. Bear with me while I state the obvious as confirmation I"m on the same page as you.
Box 1 of the 1098-T shows all funds received by the college from all sources and applied to "qualified" education expenses. The only qualified expenses are tuition, books, and lab fees. That's it; but "lab fees" is a rather broad category. Still, that category does not include room and board.
Box 5 shows all third party income received by the college from all third party sources. It would include grants, scholarships, as well as funds credited by the school for any reason, including RA duties. It does not include out of pocket expenses.
If the data is entered in the program "as is", the IRS applies things in a specific order. (This is a boiler, so bear with the "repeats" from above.) Line numbers referenced may be different, since you're dealing with a 2020 tax return.
First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to and included in the total on line 7 of the 1040.
Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is included on line 8z of the SCH 1 which gets transferred to line 8 of the 1040.
Finally, out of pocket money is applied to qualified education expenses
When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.
Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.
Now there are "ways" to do things which are perfectly legal, so that one can qualify for a credit (such as the AOC) by making all or a portion of the box 5 amount taxable. But I really don't know the details of that now-a-days, as my kids finished college about 10 years ago. Lots of things on the tax front have changed over that time.
