Q. My understanding was that the 1098-Q is tax free since it only includes the tuition paid to the school, which I fully recovered from the 529 account?
A. Yes, the 1098-Q is tax free, but not because it "includes the tuition paid to the school". It is tax free because the student had sufficient educational expenses, of any kind, including food & shelter (room & board). "I believe all students are off site". Off site student's living expenses are still qualified room & board.
Q. If I claim the 1098-Q*, can she claim the 1098-T?
A. Yes, she can and should.
Q. What would she need to justify that.
A. Mostly just the 1098-T. She enters that on her tax return, to claim the tuition credit. The TT interview will allow her to add any book, etc. expenses.
Q. Does she need to itemize books, computer, etc. ?
A. Not at tax filing time. She would only need that if audited. The books, computer, etc are only a small part of the tuition credit. The bulk comes from the 1098-T.
*You "claim" the 1099-Q by NOT entering it on your tax return. Repeating from above: "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."
You have now determined that your distribution is not taxable. 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.
