You can just not report the 1099-Q, at all, if your student-beneficiary (whether she is your dependent or not) has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
The next question is can she/should she claim a tuition credit on her return. As a grad student, she is only eligible for the non refundable LLC (Lifetime Learning Credit) which is 20% of tuition paid (even if you paid it). So, you may have to decide is it better if you pay a little tax on the 1099-Q, so she can claim the credit.
Provide the following info for more specific help:
- Box 1 of the 1098-T
- box 5 of the 1098-T
- Any other scholarships not shown in box 5
- Box 1 of the 1099-Q
- Box 2 of the 1099-Q
- Room & board paid. If student lives off campus, what is school's R&B charge.
- Other qualified expenses not included in box 1 of the 1098-T. e.g. books and computer
- How much taxable income does the student have (or what is her calculated tax on line 16 of form 1040)
- Was grad school half time or more
