Re the 1098-T: earlier you said box 1 was $27,000 and box 5 $19,000. Now it's reversed, Box 1 ($18,812) and box 5 ($27,316), which makes more sense, so I assume that's right
Enter the 1099-Q before you enter the 1098-T.
For purposes of calculation, I assume her room and board is 27,316 - 18,812 = $8504. That, by the way, is the taxable portion of her scholarship and is not enough for her to have to file (less than $12,550).
At educational expenses (yes, you enter her 1098-T on your return), enter the 1098-T and $8504 room and board. To get the screen to enter Room & Board, answer yes when asked if you have book expenses. When asked how much of the scholarship was used for room and board, enter $8504 again. You will eventually reach a screen "amount used to claim the education credit". TT may have prepopulated that with $4000 (or $10,000), you should change it to 0, since you cannot claim the tuition credit. If don't get that screen, verify on the student information work sheet (part VI, line 17) that 0 (or blank) was used for the credit.
That's all you need to do. TT will calculate the taxable portion* of the 529 earnings and generate form 5329 for the penalty exception.
*You have $27,316 of qualified expenses. $18,812 were used to keep some of the scholarship tax free. That leaves $8504 that can be used for the 1099-Q. 8504 / 20,000 = 42. 52% of the earnings are tax free (57.48% are taxable). You have 0.5748 x 6116 =$3515 taxable income.
We can reduce that, assuming the scholarship is not restricted. She can declare as much as $12,550 of the scholarship to be taxable and still not owe any tax (or have to file a return). 12,550 / 20,000 = 62.75% tax free earnings (37.25% taxable). 0.3725 x 6116 = $2278. In TT enter 12,550 when asked how much of the scholarship was used for room and board. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.
Details will be shown on the Student Information worksheet and the 1099-Q worksheet.
