Q. In this case would it make more sense to put that shortage to the 1099Q earnings?
A. The best answer is some of each. Use the scholarship to reach $12,550 (12,950 -400), to get the maximum standard deduction (12,550 -8300 = $4250). 10,038 - 4250 = 5788. 5788 / 17613 = 32.86%. 0.3286 x 5110 = $1679
Q. If so, how would I show that on the students return?
A. Not very easily. You qualify for the penalty exception, since you are claiming the tuition credit and had scholarship for the overlapping funding. So, you've got to get that in too (claim the penalty exception on form 5239). I haven't actually tried this particular situation before. So, at this point, I cannot give step by step instructions.
It may be easier with the desktop (download) software, rather than online. You can make adjustments directly on the worksheets and forms.
Let's go back to another issue: the mismatched years for part of the 529 distribution. For a discussion, see these links (repeated from above):
https://ttlc.intuit.com/community/college-education/discussion/529-provider-distributed-funds-on-12-...
https://ttlc.intuit.com/community/college-education/discussion/i-took-a-529-distribution-in-2021-for...
If you claim some of the 529 distribution, for next year, you can go back to just not entering the 1099-Q, and use the previous directions for how to enter in TT. The taxable scholarship amount will change. You may not have to enter anything on the student return (it may not be necessary to declare any scholarship taxable).
