You cannot remove the penalty. If funds were withdrawn from a 529 Plan and not used for educational expenses because the student is on a full scholarship and did not use the funds for educational purposes.
Does the full scholarship include his room and board? If not, is the amount of room and board more or less than the amount withdrawn from the 529. If the amount went towards room and board then do not report the 1099-Q on his taxes. If a portion of the amount went for room and board, then the difference needs to be reported as income on his return. You do not have to enter the 1099-Q in order to do that. Just enter the excess 529 funds as other income on Line 8f of Schedule 1.
If the room and board is in excess of the 529 withdrawal, then do not report the 1099-Q on the tax return and you do not have to enter anything on Schedule 1.
The 1099-Q is a form that does not have to be reported on your taxes as long as the withdrawal is used for qualified educational expenses. If the funds were not used for qualified educational expenses you must report the 1099-Q as income and there is a 10% penalty for withdrawal of the funds for non-educational purposes.
