You do not mention if the student has other income of his/her own. Assuming not, he can report up to $12,400 of his scholarship as taxable and not pay any tax. That is a better way to go, than to declare some of the 529 plan as taxable.
I don't know how you got "tuition paid from 529: $2171" and "taxable scholarship $2619", but don't use those numbers.
Here's your numbers:
9261 Tuition
+ 518 Books
= 9779 Qualified expenses for tuition credit & scholarships
- 4000 Used for AOTC
=5779 Allocated to Scholarship
-10,050
= $ 4271 Taxable scholarship to be reported on student's return
Since room and Board ($7890) is more than the 529 distribution ($7703), none of the distribution is taxable. It does not have to be reported. Do not even enter the 1099-Q in TT. Delete it, if you already entered it.
How to enter in TurboTax (TT): On your return Enter the 1098-T with $4000 in box 1 and box 5 blank. Enter no other numbers in TT. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return.
Since the student has less than $12,400 of income, he does not need to file. Some experts advise that he file anyway to document what you've done. In TT: enter 4000 in box 1 and $8271 (4000 + 4271) in box 5. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. TT will enter $4271 on line 1 of form 1040 with the notation SCH4271.
Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s return. The alternate workaround is to enter 0 in box 1 and $4271 in box 5.
