The qualified education expenses are tuition, books, and lab fees. That's it with no exceptions. Although the category for lab fees is rather broad.
First, scholarships/grants are applied to qualified education expenses. If anything is left over, then the excess is taxable income to the student; not the parent.
If after scholarships/grants are applied, or if there are no scholarships/grants, then 529 distributions are applied to the qualified education expenses. Additionally, 529 distributions can be used to pay for the unqualified but allowed expenses of room and board, provided that room and board was in direct support of the education. If there is anything left over then the excess 529 money is taxable income to the student; not the parent. One thing that can lead to confusion with 529 funds, is that the 529 distribution gets reported on the tax return of the individual whose SSN appears on the 1099-Q as the beneficiary recipient; be it the student or the parent.
Finally, out of pocket money is applied to any remaining qualified education expenses. Out of pocket money can not be claimed for room and board. Only for the qualified education expenses identified above.
In the end, if there is any left over funds from scholarships, grants and/or 529 distributions that are not used for qualified education expenses or R&B, if that excess amount when added to the student's other earned income is less than $12,400, then it won't be taxed since the student gets the $12,400 standard deduction anyway.
When it comes to 529 funds, I always recommend folks go ahead and enter it into the TTX program. Then, if the program determines, based on all the data entered, that the 529 funds don't need to be reported to the IRS, then they won't be reported. But if questioned by the IRS a few years down the road you will have the necessary documentation in the PDF file of the tax return for the year in question, to help support your position of not reporting it.
