There is no bug. Part of your expenses paid have been used to calculate the tuition credit or were offset by tax free scholarships. You cannot count the same expenses, you used for those, to claim an exclusion of the 529 plan earnings.
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
See the worksheets, TT prepares:
-Student Info Worksheet
-1099-Q worksheet
