Q. Can this additional $ somehow be entered on her tax form so that it is taxed at her tax rate?
A. No. The taxable earnings have to go on your return, because you were the "recipient" of the funds (the 1099-Q is in your name and SS#).
You could have done it, differently. But. it's too late now. You had the choice of having the distribution sent to you, the student or the school. If either of the latter, she would have been the recipient. The good news: there will only be a little difference, as most of the taxable earning are subject to the kiddie tax (taxed at the parent's rate, even on the child's return).
Q. However, can the student quality for either of the tuition credits, by entering on their tax form?
A. Probably not, since she is your dependent.
While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out. A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support. It is usually best if the parent claims that credit.
If the student actually has a tax liability, there is a provision to allow him/her to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit. The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable). Any tuition used by her to claim the credit, reduces the amount you can use to claim the earnings exclusion on the 529 distribution. The AOTC only requires $4000 of tuition to get the maximum credit. The Lifetime Learning Credit (LLC) requires $10K.
You say this is her last year, on college. There is a 4 time limit to claiming the AOTC (student and/or parents). But, if you're not eligible this year, you probably weren't in the past either.
