No, there is not a cap with the 1099-Q or the 1098-T
If you have entered your 1099-Q and your 1098-T and you have excess then the excess will be treated as income.
You are not required to report a 1098-T on your tax return. To calculate if you are eligible for AOTC, take the amount in Box 5 (scholarships) of the 1098-T and subtract the amount in Box 1, this is the amount that would be eligible for the tuition credit. If you received more in scholarships Box 5 than the tuition in Box 1, the excess is taxable and should be reported as Other Income. However, if the amount in Box 1 is more than Box 5, then you might not want to report the 1098-T.
Funds distributed from a 529 Plan, will be reported by the bank on a Form 1099-Q. The 1099-Q is sent to the owner/recipient of the 529 Plan funds. The Form 1099-Q is to be reported as income if they were not used to pay qualified college tuition/expenses. If the amount reported on the 1099-Q were used to cover qualified college tuition/expenses you do not need to report the income. If the amount exceeds the amount of college tuition/ expenses then the excess needs to be reported as other income on your 1040.
In summary, if the 1099-Q distribution is enough to cover the tuition, room and board, other expenses, and Box 1 of the 1098-T is more than Box 5, then you might not want to report the 1098-T as this will create excess income and you will have to report the income as other income. The 1098-Q does not have to be reported, but it does need to be taken into consideration and if you are going to attempt to get the AOTC credit, then you do need to report the 1099-Q on your taxes, which in your case, comes out that you owe income. The 1098-Q should also be reported if the distribution was more than your tuition, room and board, etc.
Sounds to me like you will not receive the AOTC credit.
What are the Education Credits?
@Raglop [EDITED 3/12/2022 1:57 PM PST]
