Yes, this is correct. The IRS is flexible about students, or the the taxpayer claiming the student's exemption, getting the best tax break for their situation. If the student (your son) is your dependent, you enter the forms (1099-Q and 1098-T) as well as all the other pertinent education information. Please enter the 1099-Q FIRST. Once you select "Maximize My Tax Break" the program will figure the best credit for your situation.
Room and board can NOT be used for an education credit, but can offset the tax on the distribution reported on the 1099-Q.
You seem to have this figured out. If you are eligible and feel the best credit is the American Opportunity Tax Credit, allocate up to $4,000 tuition, fees, books and supplies towards the credit (Lifetime Learning up to $10,000). Add the Room and Board to whatever tuition, fees, books and supplies expenses are left and use this amount against the distribution. WHATEVER AMOUNT IS LEFT WILL BE TAXABLE TO THE RECIPIENT. The distributions should always be made by the student (or transferred directly to the school) so that the tax will be at the student's rate.
To see what the program is allocating to the credit, go to the last screen in the "Education Information" interview under the education section. (see screenshots). You can change the amount you want to go to the credit here. The program will generate a worksheet to show how much of the distribution to report as taxable income.
Click the link below for IRS Pub 970 with more information:
CLICK
HERE for IRS Pub 970 Education Credits
If your son does need to report income he should follow these directions:
To report Scholarship income as taxable income
Sign into your account and start your return
Click Federal on
the left side-bar
Click Wages &
Income on the top
Scroll down to Less
Common Income and click Show more
Scroll down to Miscellaneous
Income, 1099-A, 1099-C and click Start
Scroll down to Other
reportable income and click Start
“Any Other Taxable
Income?” screen click Yes
“Other Taxable
Income” screen type a description such as Taxable 529 Distribution into the Description box
Enter the amount into the Amount box and click Continue
[Edited 03.17.18 | 4"00PM]
