Since you're not claiming a tuition credit nothing gets entered on your tax return. She is not eligible for a credit, so we do not allocate any expenses on her return for the credit.
She has $36,000 + 10,000 + 500 = $46,500 Qualified educational expenses (QEE).
$46,500 -19,000 allocated to Scholarship = $27,500 available for the 1099-Q. Since that is more than the box 1 (1099-Q) amount ($27,000), none of it is taxable.
The simple thing to do is not enter either the 1099-Q or 1098-T on her tax return. Both are only informational documents. The numbers on them are not required to be entered onto your tax return.
When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
If you want to generate the work sheet, enter the 1099-Q first. Enter the 1098-T, books and room & board later, at the educational expenses section. A glitch in TT is that TurboTax may allocate part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free. Check the student info worksheet. If you need to change it, Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary". Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it to 0. You may reach that screen sooner.
