The TurboTax (TT) interview is tricky and mistakes can be made.
One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q.
@kbr25 said "we DO need to pay taxes on them because another relative actually pays their college tuition"
That's irrelevant. Although the general rule, in taxes, is that you must be the one making the payment, to get the deduction, there is an exception for education. You may count all expenses, for the 529 distribution, even if paid by someone else.
@kbr25 said "because of the there is no other expenses to claim besides what is in box 1"
That's unlikely. Room and board are qualifying expenses for a 529 distribution, even if the student lives off campus. Board (food) is a qualifying expense even if the student lives at home. Books, and even a computer (usually not shown in box 1 of the 1098-T) are qualifying expenses.
Having the student declare some of her scholarship taxable, on her return, can free up more expenses for you to use against the 1099-Q (assuming the scholarship money is not restricted to being used for tuition).
Provide the following info for more specific help:
- Are you the student or parent.
- Is the student the parent's dependent.
- Box 1 of the 1098-T
- box 5 of the 1098-T
- Any other scholarships not shown in box 5
- Does box 5 include any of the 529/ESA plan payments (it should not)
- Is any of the Scholarship restricted; i.e. it must be used for tuition
- Box 1 of the 1099-Q
- Box 2 of the 1098-Q
- Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
- Room & board paid. If student lives off campus, what is school's R&B charge. If the student lives at home, only the school's board charge for on campus students.
- Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
- How much taxable income does the student have, from what sources
- Are you trying to claim the tuition credit (are you eligible)?
- Is the student an undergrad or grad student?
