Sticking to the issue:
$27,166 of qualified expenses
- 14,000 paid by tax free scholarship
= !3,166 of expenses are available for the 529 distribution
13,583 - 13,166 = $417 is your "non qualified distribution". Since more than that was paid by scholarship, none of the distribution is subject to penalty.
$417 / 13,583 = 3.07% of the earning are taxable
3.07% x 8006 = $246 of taxable income to be reported on on line 8 of schedule 1
If TurboTax isn't giving you this result, you entered the numbers wrong. Your $7000 number is not part of the calculations.
A student who lives at home can still cover his "board" with 529 money. You may use the lower of actual food cost or the school's meal allowance for on campus students.
In addition, if otherwise eligible, you should claim the tuition credit, even if it makes more of the 529 taxable (or the student needs to declare some of his scholarship taxable).
