Q. Do we owe taxes on $4117, $12150, or some other amt?
A. Simple answer: Some other amount. You owe tax on $10,595. You paid $22,861 in expenses. Less the $4000 used for the AOTC = $18,861 can be used against the 1099-Q(s). 18,861 / 35,011 = 53.87% of the earnings are tax free or 46.13% is taxable. 0.4613 x 22,968 = $10,595.
As others have said, you cannot allocate between parents and the student-dependent unless each is a recipient of a 1099-Q*. But, if so, you are free to allocate the expenses as you see fit.
Q. Should we allocate enough to cancel the 1099 income to parent ($8k with earnings of $5408) and the rest to student? Or some other way?
A. Some other way. But first to address cancelling the parent income. That usually is slightly better. But, the income is unearned income and is subject to the "kiddie tax" on the student's return. You may have to do trial returns to see which way is best. But, the better way, is to have the student report some of his scholarship as taxable income**, to free up expenses for the 1099-Q. Taxable scholarship is treated as earned income, for purposes of calculating a dependent's standard deduction. Here's a long thread, with detailed explanations and some examples. If your student has no other earned income, he wants to declare $11,850 of his scholarship as taxable. This would lower the taxable amount of the 529 plan earnings distribution to about $2800.
https://ttlc.intuit.com/community/college-education/discussion/is-any-of-my-son-s-college-scholarshi...
*For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.
** You cannot do this if the conditions of the grant are that it be used to pay for qualified expenses (tuition and fees).
