Q. The scholarship is a taxable income. Will I receive a tax form for that from her college?
A. Yes, but not specifically for only the taxable portion. The form is 1098-T. Box 1 is tuition and fees and box 5 scholarships. Put simply, the difference between box 5 and box 1 is the taxable amount. But that taxable amount can be reduced by the cost of any required course materials (books and computers and software).
Q. Does it matter who the 529 distribution goes to?
A. Yes, See the general discussion above. The "recipient" reports the 529 earnings income on their tax return.
Q. How much can I withdraw in 2021 without incurring a penalty? I assume it is not the entire $81K because her scholarship is for the entire 21/22 school year?
A. Correct, it's not the full $$75K (full cost of attending college). You don't go by the $81K (unless the extra $6K is something that 529 money is allowed to be used for, such as books). I suspect it's simply half the $75K, if the school is a typical 2 semester school with the first semester ending in 2021. The school should be able to tell you for sure. You can add up front costs (typically purchasing a computer).
