@confusedrf @jlar - I agree with @jlar approach and math.
$4,000 of expenses yields the $2500 AOC credit - look at form 8863 and you'll see how $4000 drives $2500. That has to be calculated BEFORE dealing with the 1099Q.
On the 1099Q, the remaining 'qualified higher educational expenses' need to exceed the amount of the distribution for the earnings in Box 2 to be tax-free.
if you look up IRS publication 970, on page 58 (left side), it discusses what expenses qualify and as it relates to Room and Board, it states:
3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.
a. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the school.You may need to contact the eligible educational institution for qualified room and board costs. '
So the statement in bold MAY BE how the student who lives at home can use room and board to cover the distribution of the 1099Q. I say MAY BE because the opening sentence does say "INCURRED". Personally, I don't agree that this is viable, but I am just one person.
What it says to me is 'actual expenses', not to exceed the greater of what the school said it would cost or what they actually charged. So, for example, I stay in a 4 star hotel for the semester, i could not cover all that expense with the 1099Q distribution - rather, I am limited to what the school said it would cost (paragraph a).
