Education

PERHAPS you are confused as to "NON-QUALIFIED" expenses. 

For example, take Room and Board expense-

You may be allowed to allocate Scholarships to that expense, in which case the scholarship may be taxable income that the student must claim, 

HOWEVER 

a distribution used for Room and Board is NOT taxable.  

The expenses are handled differently (if taxable or tax-free) depending on the type of assistance used. 

UNQUALIFIED means they may not be used for the Education Credit. 

No, it is not cheating, anything paid for the student is claimed by the taxpayer claiming the student. 

No, not a problem, enter the expense for Room and Board for daughter 2 and the distribution should not show as taxed. 

According to the IRS: FOR DISTRIBUTIONS

"These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. 1. The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. a. Tuition and fees. b. Books, supplies, and equipment.

2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.

3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts. a. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. b. The actual amount charged if the student is residing in housing owned or operated by the school. You may need to contact the eligible educational institution for qualified room and board costs.

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn’t include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)"

"Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim the student as a dependent on your tax return, you are considered to have paid the expenses."

IRS PUB 970