Bottom line, in your situation: do not enter either the 1098-T or 1099-Q on ether your return or your student's. Both are only informational documents. The numbers on it are not required to be entered onto your tax return.
Since you are not eligible for a credit, your daughter's scholarship was used for qualified expenses (and therefore not taxable) and the 529 distribution was all used for qualified expenses (even after adjusting for scholarships), you have nothing to report; you have nothing to report.
When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
Yes, "Amount used to calculate education credit or deduction" should be zero. This is a flaw, in TurboTax, it will sometimes assign expenses to the credit, even for ineligible (by income ) parents. Good catch!
Q. It seemed she paid a small amount of tax last year for interest. I'm not sure if input was wrong last year? please clarify.
A. If you numbers were similar to this year, she should not have paid any tax. But, if they did not come even, that's possible. TT assigning expenses to an unclaimed credit may have been the problem. Check last year's 1099-Q work sheet and the the student information worksheet for details. Or depending on how small the tax was, just forget about it.
