Q. Are you sure I can include room & board when assessing whether we had sufficient education expenses to cover the distribution?
A. Yes. Room and board have never been qualifying expenses for a tuition credit (or the old tuition deduction), the savings bond interest exclusion or for tax free scholarship. But they are a qualified expense for a 529/ESA distribution, as long as the student was half time or more. This is true even living off campus. Some even qualifies if living at home.
Q. If I allocate $5K of the $14K in expenses from her 1098-T to 1099-Q withdrawal that I don't report on our (her parents') return, can she claim the remaining ($14K-$5K = $9K on her return to claim some sort of tuition credit (ideally a deductible?)?
A. Yes, there is only the credit. Better yet, claim some room & board so she can claim the maximum ($10K) need for the maximum credit*.
Q. If so, should she enter NEITHER the 1098-T nor the 1099-Q, but simply $9K of (incremental) qualified education expenses?
A. A compromise. She enters the 1098-T with the $9K (the adjusted qualified expenses) in box 1 (or $10K if you use some R&B).
* I assume she is a grad student and is not eligible for the American Opportunity Credit (AOC)(or she or you have already claimed it the max 4 times). The Lifetime Learning Credit (LLC) is 20% of Tuition & fees up to $10K . It is non-refundable. That is, the LLC can only be used to offset an actual tax liability.
