What "default" are you referring to? The 529 funds are reported as taxable income "initially" in the tax year they are paid/received. Their taxability is offset by the qualified education expenses that money is used to pay for, in the same tax year that money is paid/distributed.
What tax year it pays *for* doesn't matter. But the funds must be used to pay those qualified expenses in the same tax year they are paid out of the 529 account. So if funds were paid out in say, Dec of 2016 and not used to pay qualified expenses until 2017, then on the 2016 return it's taxable income. Period.
That means in 2017 the taxes you paid on those funds the previous year will be offset because you would have then used out-of-pocket money to pay those expenses. However, it can hurt you if you withdraw in 2016 with the intention of paying room & board expenses in 2017. R&B is not a deductible out of pocket expense.
To avoid this issue, what you can do is on the screen that asks "Did [student]'s aid include amounts not awarded for 2016 expenses?" indicate the amount of the 1099-Q funds that was used to pay for 2017"room and board" expenses, that were actually paid in 2017 with those funds. Then on the next screen you're asked if you paid for room & Board with a "SCHOLARSHIP OR GRANT". Select NO, because you did NOT use scholarship money or grant money to pay room and board. (You used 529/Coverdell funds for that)
