Q. The students college expenses $31,281 were greater than her scholarship $4,000 and 529 withdrawal $19,806. Given that, I assumed her taxes would be based solely on her job income?
A. Correct.
Q. However, when including the college, her taxes increase and her refund decreases?
A. TurboTax (TT) just doesn't do a very good job with the "information overload".
Delete the 1098-T and 1099-Q.
The 1099-Q and the 1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.
You can just not report the 1099-Q, at all, if your student-beneficiary 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 or is sent to the IRS. But, it will prepare a 1099-Q worksheet for your records.
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 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income.
You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. You are not eligible for the credit and you know none of her scholarship is taxable.
