Assuming Sara is under 24, she still cannot claim the AOTC (refundable portion) because she does not provide more than half her support with EARNED INCOME. It's an additional rule. To not be a dependent, the rule is only that she provided more than half her own support, without regard to the source of the support.
But to answer your question: to keep the 529 withdrawal from being support, you just pay tax on it, instead of claiming you used it for education. Some penalty may be avoided because some of the QHEE was covered by Scholarship. being away at school, even for the entire year and even living off campus. id still considered only a temporary absence from the parents home.
But, the information you provided indicates that Sara CAN be claimed as a dependent. She has not provided more than half her support. Scholarships are third party support, not support provided by the student.
