Since you are not claiming the tuition credit, you do not need to enter the 1098-T.
You don't mention room & board (R&B). While R&B are not qualified expenses for the tuition credit, or tax free scholarship, R&B is a qualified expense for a 529 distribution, even if the student lives at home.
Another thing to beware of: 529 money can be use for off campus living, but you are limited to the lesser of your actual costs or the school's "allowance for cost for attendance" . The student must be half time or more.
If you continue to have problems getting TT to do it right, here's a workaround: Enter the 1099-Q. When asked who the student is, answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses, including R&B. Press Done at the 1099-Q summary screen, to get there. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later.
In addition to tax, the 10% penalty will apply to the non qualified portion of the earnings.
Example:
$10,000 in educational expenses (including room & board which is only qualified for the 1099-Q)
- $7,000 used on the student's return for his 1099-Q
=$3000 Can be used against your 1099-Q
Box 1 of the 1099-Q is $5000
Box 2 is $2800
3000/5000=60% of the earnings are tax free; 40% are taxable
40% x 2800= $1120 taxable income
There is $1120 of taxable income (on the recipient’s return)+ $112 penalty
Another thing to consider: the student's lower tax rate, although the kiddie tax will kick in early. Make some of his distribution taxable, and less of yours.
