To keep it simple, I would not enter the ESA 1099-Q, on the student's return. It appears that the earnings are less than 0 and you do not need to allocate any expenses to that distribution. You also do not need to enter the 1098-T or any expenses on her return, unless she needs to report some of the scholarship as taxable.
Furthermore, again, to make it simple, I would not enter the 529 1099-Q, on your return. It's fairly clear that you have enough expenses to cover the $13,830 distribution, even after allocating $4000 to the AOTC. If you come up short, then make some of her scholarship taxable, on her return. Again you do not have to allocate a full $1750 of expenses to the scholarship. In that case, she enters the 1098-T on her return too (it can go on both yours and hers, allocating as needed). For simplicity, on her return, enter the 1098-T with $0 in box 1 and the amount of scholarship you calculate as taxable in box 5. Taxable scholarship is treated as earned income for a dependent's standard deduction (earned income + $400), so she will not pay any tax.
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 (you've done that) to see if there were enough expenses left over for you to claim the tuition credit.
References:
- 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."
- IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
To claim the AOTC, you simply enter her 1098-T on your return. To keep it simple, enter the 1098-T with $4000 in box 1 and box 5 blank. What you enter, in TT, is not sent to the IRS. It's just used to do the calculations.
Theoretically, TurboTax can handle the entering of all the info you have and come to the right answers. But, it can get messy.
