Unless the scholarship is restricted; that is, it must be used for tuition, you have the option of how you allocate expenses. For most people, it is better for the student to pay tax on some of the scholarship, rather than making some of the 529 distribution taxable of forgoing the tuition credit. Up to $12,400 of scholarship can go untaxed depending on the student's other income.
As AmyC says, you need to factor in other items: room and board (even if student lives at home), books and computers.
Expanding your example:
Tuition & fees = $16,000
Scholarship = $ 6,000
Room and Board = $5000
Books and computer = $1000
Student had $6,200 wages from summer job
Declare $6000 scholarship taxable. Student has $12,200 taxable income (6000 + 6200). His standard deduction is $12,400*. He owes no tax.
Use $4000 of tuition to claim American Opportunity credit.
That leaves $18,000 ($16,000 + 5000 + 1000 - 4000} of expenses for the 529 distribution. You can withdraw $18,000 tax free.
You PA 529 GSP agent is essentially correct, scholarship CAN be taxable.
*Note: a dependent's standard deduction is $1100 or his earned income +$350, but not more than $12,400. For purposes of this calculation scholarship is treated as earned income.
