Anything in box 7 of a 1099-Misc is considered self employment income. Recipients with as little as $400 are required to file a tax return and pay "Self employment tax" (SET), even if no income tax is due. SET is how the "self employed" pay their social security and medicare tax.
"When I input her info on my return, TT said that her 529 wasn't resulting as income…”
That's not correct. You've made a mistake somewhere. So, yes, you have the same situation with your daughter: You have $36,260 ($8860 scholarship + $27,400 529plan) of tax advantaged disbursements but only $27,025 (12,154 +14,404 +467) of educational expenses. Some of that tax advantaged money is taxable. You're also entitled to a 2nd education credit for a 2nd student (another AOC if she's an undergrad).
On your return, again enter $4000 in box 1 and leave box 5 blank, at the 1098-T screen. Enter no other amounts in the TurboTax (TT) interview. That should get you the maximum AOC.
On her return, enter the 1099-Q and complete the 529 distribution interview, before entering the 1098-T. At the 1098-T screen, enter $12,154 in box 1 and $8860 in box 5. Enter books ($467) and room & board ($14,404) when asked for books. When asked how much of the scholarship was used for room and board, enter $8860.
Again, you should reach a screen “education expenses used for a tax credit or deduction”. Enter the $4000 you claimed on your return.
I calculate the taxable distribution as $2660. Note that your 529 plan distribution ($27,400) is slightly more than your total expenses ($27,025). That means you’re gonna pay some 10% penalty on the non-qualified portion of the distribution (about $23 in “additional tax”)
