Thanks so much for hanging with me and for the additional information. I did get the numbers reconciled, I had a glitch in my manual calculations above after combining, which have been updated below for posterity.
The one curve in this is that while I did combine the 1099-Qs in TT, one 1099-Q had box 6 (recipient is not the designated beneficiary) checked, and the other did not. The unchecked 1099-Q covered a direct to college payment, and the checked 1099-Q covered two different distributions, one for the amount owed to the college, for which I sent a persona check in an equal amount to the college, and the other for $7000 of the scholarships which I kept. Since the numbers are coming out as expected now I'm thinking I'll just keep it as is, if there's a question I have all the backup documentation.
Box 1: 7235
Box 2: 4164 (earnings)
So.. plugging these into your equation:
$27,166 of qualified expenses
- 14,000 paid by tax free scholarship
= !3,166 of expenses are available for the 529 distribution.
13,583 + 7235 - 13,166 = $7652 is your "non qualified distribution". Since more than that was paid by scholarship, none of the distribution is subject to penalty.
$7652 / (13,583 + 7235) = 36.6% of the earning are taxable
36.6% x (8006 + 4164) = $4457 of taxable income to be reported on on line 8 of schedule 1
