You have 16,078 of qualified expenses. Less $4000 used for AOTC = 12,078 of expenses available for the 1099-Q.
12,078 / 16,078 = 75.1% of the earning will be tax free (24.9% is taxable). 0.249 x 5130 = $1276 taxable unearned income on the student's return. $1276+ $653 wages = $1929 total income minus $1100 standard deduction = $829 taxable income. She'll pay about 83 tax and you'll get a $2500 credit. The Kiddie tax will not kick in (less than $1100 taxable income). Book and computer expenses could improve that; maybe even enough that she doesn't have to file. A computer is accepted as required, at least for 529 purposes (if not the credit)
Yes, the AOTC is only applicable for 4 years. For the 5th year (or one of the twin semester years, in-between), you can claim the (up to) $2000 Lifetime Learning Credit (20% of tuition up to $10K).
Q. If I wanted to 'say' that $4k of the payment was from parents to get the tax credit; What would I put on my taxes?
A. Enter the 1098-T full amount. The adjustment will be made on her return. Do not enter the 1099-Q on your return. (It would also be OK to just enter $4000, it works either way, because only $4000 is "used").
Q. How would I know if the resulting 'overpayment' of 529 funds to my daughter would result in enough tax to cause her to have to file?
A. TurboTax can't easily do that for you. You have to do it manually (I did it above for you). She does have to file. If she had enough other expenses, she would not have to file just to show that all of the 529 was NOT used for qualified expenses.
On her return, enter the 1099-Q first. Enter the 1098-T, exactly as received, on the student's return. Enter book and room and board expenses separately. To get the screen to enter Room & Board, answer yes when asked if you have book expenses.
In her interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000.
Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s interview . Check the student information work sheet (part VI, line 17) to verify it was entered.
