@shirlkoul In most cases, you can simply ignore the 1099-Q (don't report it at all). See KrisD15's reply for details.
But, you have to coordinate with the student and his/her parents. If they have used some of the tuition payments to claim a tuition credit, you may not use the same expenses to claim an exclusion of the 529 plan earnings.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship*
-$4000 used to claim the American Opportunity credit (on the parents return)
=$3000 Can be used against the 1099-Q ( on your return)
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)
*Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.
