@TaxGPVA - the reason TT asks for all the 1099-Qs to be enter and then all the questions is it decides based on those answers which 1099-Qs to entertain and which ones to dismiss as the average person wouldn't know what to do. So rather than explain all the rules to the average person, TT just asks you key them all in and then it decides which ones to use and which ones to dismiss - there is less risk of error that way. In fact, as detailed below, TT needed the grandfather's 1099-Q to be part of the equation because too much was distributed in total from the 529 plans (small, but see below)
The "maximizer" in TT it is going to use AOC at $2500 - because $2500 of credits are more valuable than $2500 of deductions. You are better off with the $2500 of AOC credits! That will drive a $1,000 credit on line 18c of the form 1040. if you "insist" that AOC only use $2000, your credit will only be $800 and you will not get back the other $200 any other way.
That leaves $17,500 in college expenses to deal with. Assume $2,500 of the tuition is covered by the AOC credit.
The three 1099-Q disbursements are $18,000.... and all the remaining expenses are qualified expenses by the 529 plan. This mean that $500 more than is required was disbursed. That also means a small part of the Box 2 earnings on YOUR 1099-Q are subject to tax and you will see that on line 8 of Schedule 1. That is because it wasn't needed to cover the expenses- you can't double dip and have both the 529 disbursements and the AOC credit cover the same dollar of college expenses. The penalty for attempting to "double dip" is that part of the Box 2 earnings are taxable. (the Box 3 cost basis was all after tax to begin with so there is no impact)
The $2000 that you came out of pocket for has no real bearing on the situation!
I was able to create a dummy tax return in TT to confirm this result.
ps, because your child has no other income, there is no further reporting requirement of the 1099-Q's on his tax return because he is not required to file!
hope that makes sense!
