Here's the simple solution: don't enter the 1099-Q at all. Like you said, it's too confusing. if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math** to see if there were enough expenses left over for you to claim the tuition credit. You cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. It will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.
Do enter the 1098-T on your return so that you can claim the tuition credit. You have sufficient expenses to qualify, even after factoring in the 1099-Q.
Q."Doing so seems to get me a $2500 credit. I think I get another $500 since she is a dependent"?
A. That is correct!!
Q. "If I do not report it all...well that does not seem right".
A. Whether you enter it in TT, or not, it does not get "reported" to the IRS because the taxable amount is 0.
**The math: 40K expenses minus 22K scholarship = 18K. 18K minus 11K paid by 529 plan = $7K eligible for Tuition credit (it's actually much more since 529 money can be used for room & board). But it only takes $4K of expenses to get the maximum $2500 credit
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Info only (if you insist on entering it);
Problem: "suddenly it says she owes $450 in taxes instead of getting back $300. I figure that is because the 1098T is no where to be found to offset things".
You have to enter the 1098-T on both returns. To claim the credit on your return and to enter offsetting expenses on hers. You have to adjust her expenses for the $4K you claimed (it's all in TT, just complicated)
Problem: If I enter it on MY return (I already entered the 1098T) it pops up a message that says something like $2K is taxable...BUT the amount it has calculated to that point for MY refund does not ever change. So who is responsible...what is TT trying to tell me
You've simply made a mistake (it's complicated). See the math above, nothing is taxable.
