No, the split between the earnings and the basis of the 1099-Q is not used in calculating taxability. The distribution from the 529 plan is considered tax-free unless they are not used for qualified education expenses.
The reason there are taxes being calculated has to do with the 1098-T and the 1099-Q. Funds distributed from a 529 Plan, will be reported by the bank on 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. Here is an article that talks about What is IRS Form 1099-Q. Reporting 529 Plan
The 1099-Q and the 1098-T are forms that do not have to be reported on your tax return or your son's. If you are claiming your son as a dependent, then he cannot claim the education credit and by reporting the 1099-Q on his return, it is going to cause a tax liability as the entire amount of the 529 distribution is going to be considered income. Based on the information provided, it does not appear that either you or your son would be able to claim the education credit. You cannot take an education credit when you have sufficient funds from the 529 plan to cover the qualified educational expenses.
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 or the 1099-Q as this will create excess income and you will have to report the income as other income. The 1099-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 1099-Q should also be reported if the distribution was more than your tuition, room and board, etc.
As long as the 529 distribution was used to pay for qualified educational expenses and does not exceed the 529 distribution and the scholarship funds, It sounds to me like you may not want to report either the 1099-Q or the 1098-T on either tax return as it appears that it is going to create a tax liability.
