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. 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 your daughter to claim the tuition credit, on her return. 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."
Assuming you want to enter it anyway:
Q. Is there a way to record this so I do not pay taxes on the earnings?
A. Yes. It's actually much easier to enter, in TT, when the student-beneficiary is not your dependent.
Instead of entering the educational expenses in the education expenses section, you get to enter it in the 1099-Q section of TT. When asked who is the student, check "someone not listed here" . On the next screen, enter the student's name. This will eventually give you one simple screen to enter all expenses, including the info on the 1098-T. Press Done at the 1099-Q summary screen, to get to that screen.
